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Indian stock market outlook for 2009

(RTTNews) – In 2008, the Indian stock market fell a victim to the financial global turmoil that unfolded in the credit markets. Many analysts had predicted in late 2007 that the 4-year bull market would see some correction in the first quarter of 2008. The market did decline in line with expectations, although the depth and the breadth of the decline witnessed was beyond anyone’s comprehension.

Moderating Valuations

The BSE Sensex, which is a proxy bellwether of the Indian market, more than halved in 2008, the steepest decline since 1991, when the country faced a balance of payments crisis that triggered economic liberalization.

The price-earnings (PE ratio) of the BSE Sensex, a common tool to evaluate stocks, also fell in line with the market from around 28 in January to about 12 times at the end of the year.

At current levels, the BSE Sensex is valued at less than half its four-year average. The index is trading at 8-9 times the estimated earnings for 2009-10 compared to the 18-19 times at the peak of the bull rally in January.

The rest of the global markets also witnessed their worst crisis since the Great Depression of the 1930′s, as major financial institutions went bust, liquidity dried up and credit crunch forced many emerging-market economies stagger to the International Monetary Fund for help.

The MSCI World Index, a benchmark of developed and emerging equity markets, fell 45% in the period, while the FTSE and the Dow Jones Industrial Average tumbled 35% each.

Institutional Interest

In 2008, foreign institutional investors (FIIs) made a beeline for US money market funds and treasury bonds, as the steadily appreciating dollar was perceived as a “safe haven.” FIIs pulled out an estimated $ 13 billion from the Indian market in 2008, the first net outflow in 11 years and the most in 15 years.

After remaining net sellers all through the past few months, FII’s are turning positive on India, as they bought shares worth Rs.1217 crore so far in December.

Despite heavy outflow and a gloomy outlook for global equities, the number of registered FIIs in the Indian market increased to nearly 1,600 at the end of 2008 compared with 1,219 in 2007.

Mutual funds are reportedly sitting on Rs.37, 000 crore of cash. The deployment of these funds should trigger a buying wave in the market.

Positive Long-term Outlook

At current levels, it is perceived that all bad news has been discounted, including a possible decline in earnings for the December quarter. Many analysts say that the market has bottomed-out and presents attractive investment opportunity for long-term investors.

Given the steep market decline, many growth companies are available at single digit price-to-earnings ratios and below their net asset values. Also, historically, earnings in India are less volatile than other emerging markets.

The near 70% decline in crude oil prices since July this year should have some positive impact on growth. The relatively stronger growth prospects may attract money from the overseas long-term pension funds and cash-rich non-US FIIs.

The RBI and government have taken adequate policy steps to minimize the impact of the global slowdown on the Indian economy. More measures are on the anvil.

A strong outlook for the rupee and interest rate arbitrage available with the Indian market may attract global hedge funds and investors from Japan.

Given the macro economic situation, China and India are likely to remain favorites for foreign funds despite some slowdown expected in the next 1-2 years. These countries have solid fundamentals and would continue to deliver significantly higher growth rates compared to the other regions of the world.

Growth Concerns Linger

Average GDP growth of emerging markets is expected to be 3.8% in 2009 compared to a 0.8% decline for developed countries. India in particular is likely to deliver at least 7% growth this fiscal year.

That said, a lack of confidence and fears of some lurking dangers plagues the markets at this moment. Investors fear that a vicious circle of economic contraction and worsening financial conditions is underway.

In the advanced economies, the US is likely to experience its worst recession in decades. There is the risk of global credit crunch getting worse. A lack of consumer demand, rising unemployment and sharply falling commodity prices may raise concerns about deflation.

De-leveraging could continue for some more time, as hedge funds and other leveraged players are forced to sell their assets held elsewhere, thus causing more pain in almost all emerging markets.

Investors fear that recession will deepen in the Euro Zone, the United Kingdom, Continental Europe, Canada, Japan, and the other advanced economies, resulting in a hard landing for emerging-market economies.

Back home, investors await GDP report for November and quarterly results for the December quarter. Negative earnings surprises may put further downward pressure on stock prices.

A sharp decline in capital flows from abroad and rising risk aversion among promoters in the aftermath of massive wealth destruction may derail India’s investment-driven growth theme, at lease in the next 1-2 years. Cautiousness may prevail for some more time on account of general elections in April-May.

To sum up, the long-term outlook remains positive for the Indian market, though in the short term, it may show extreme volatility on account of apprehensions over the slowing growth, selling by foreign funds and investment opportunities in other asset classes like commodities.

Investors may deploy money in equities selectively. Despite concerns about the lingering damage to investor confidence, the Indian market is not expensive and presents a rare investment opportunity on account of attractive valuations, strong fundamentals of the economy and relatively better growth outlook.

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