Most of the market participants are unprepared for an extended rally from these levels and hence it becomes that much easier for the market to keep surprising the market participants and scale newer highs. Above new high a vertical run-up in Nifty upto 7000 is not ruled out and probably this will take most of the market participants with awe and dumb-struck moment. Technically as well we have reached to an inflexion point where the triangle pattern of last six years is about to breach, which will make the indices take a bigger and larger leap.
Last couple of weeks the market is in a cheerful mood. Price action seems quite confident of scaling and kissing the all-time high. As Diwali is in the offing, market generally tends to hit Diwali with a bang. Moreover, at times there has been the case that Diwali generally coincided with a major trend setter as far as sentiment goes and usually marks the crescendo. The seasonal festivities started with Dr. Raghuram Rajan officially taking the seat as a Governor of RBI and the market warmly welcomed him with a rally, unflinching, so far. Moreover, post this event certain steps were taken by RBI, which has marked an intermediate bottom in the INR and at the same time, current account deficit of India started its corrective course. This has undoubtedly relieved some of the pressure off the market sentiment which was otherwise low. This resulted in improving macro and the FII’s took a positive stance on Indian equities post the developments. FII’s generally tend to take a top down approach on emerging market and macro factors certainly weighs heavily in their top-down approach which is definitely being noticed in the kind of FII inflows which we are witnessing in the last couple of days.
It could be a cracker of Diwali with foreign funds splurging and also cherry picking stocks and Rupee stablizing. FIIs have pumped in $15 billion into Indian equities so far this calendar year. More so, the expectations that the Federal Reserve will keep its stimulus in place for longer, following the confidence sapping US fiscal impasse. This impasse will certainly keep the bond buying programme postponed to early next year and this also adds up the extra zing in the emerging market basket
Currently, Sensex is trading close to the14x on a one-year forward P/E. On one-year forward P/B, Sensex is currently trading at 2.6x, a discount to the historical average of 2.8x
BSE Sensex trailling P/E and BSE Sensex trailling P/B 2006 - 2013
The major call one needs to take in the market is whether all-time high to be conquered this time and the Nifty & Sensex gives a successful closing above it. Though in the last couple of attempts, Nifty has faltered in its attempt and market participants are skeptical this time as well to take a call on the market beyond all time high as most of them perceive that the fundamentals are not conducive for a market sustaining beyond that. We have in last couple of times highlighted the fact that all time high simply remains a psychological mark and the relevance of it is diminishing with every passing year because the P/E multiple, P/B and other valuation metrics of the Nifty in 2007 and today are hugely different. From there till now Nifty stocks have grown at a compounding annual return of of 7% and all the valuation metrics in 2007 at a euphoric state were quite exorbitant and today, in dismal economic state, is lying highly depressed, despite approx 8% CAGR in EPS of Nifty and Sensex in last six years.
The P/E multiple compression is because of slowing down of economic activity, GDP decelerating and higher inflation and interest rate in the system and more importantly growth of corporate India slowing down considerably from 25 per cent compounding earning growth from FY2003-2008 to roughly 8 per cent compounding annual growth rate in earnings from FY2008-2014E. The companies which have announced their results for the quarter ended September 30th have shown an annual increase of 17.2 per cent in revenues, reversing a declining trend seen in the past quarters. Net profits have grown 9.11 per cent; a tad lower, as rising input costs are beginning to squeeze bottom lines. Around 40 per cent of the BSE Sensex earnings buoyancy is due to the information technology and other export-driven sectors, where the currency has had a positive impact and is driving the initial optimism, a trend evident in the chart attached.
Looking with optimist’s view of the glass being half full, currently, both margins and sales growth have bottomed out already and if mean reversion of margins is assumed, the earnings are estimated to double in four years. Markets generally anticipates a improvement in earning cycle or some other major developments, six months in advance and starts building on it. At present it seems that the market is in a state to conquer the all-time high and probably if that were to happen, it will lead to a vertical run-up to election. Most of the market participants are unprepared for an extended rally from these levels and hence it becomes that much easier for the market to keep surprising the market participants and scale newer highs. Above new high a vertical run-up in Nifty upto 7000 is not ruled out and probably this will take most of the market participants with awe and dumb-struck moment. Technically as well we have reached to an inflection point where the triangle pattern of last six years is about to breach, which will take the indices take a bigger and larger leap.
At the time, when the Indian currency has stabilized on back of concrete steps taken on FCNR-B and tier II banking capital norms, it has successfully fetched more than USD 10 billion. Other major developments include the initiation of an idea to induct India on the JP Morgan bond index, which could be a game changer, and expected to bring larger dollar inflows of more than USD 15 billion in Indian kitty. Along with the currency stabilization, CAD has improved on back of gold imports slowing down, exports picking up and imports stabilizing and contracting. Many positive measures are being taken by the Government recently and hopefully faster reforms in 2014 will put the economy back on a high growth trajectory. Election next year is the most awaited event trigger for the market.
