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Indian Markets – Short Term Pain, Long Term Gain

July 4, 2008

The Indian market has corrected by a whopping 35% since the Jan-08 highs, one of the biggest drops in Asia and Emerging Markets. Inflation is at a 13-year high and fiscal deficit pressures have overshadowed fears of a US recession and a drop in global risk appetite.

Corporate performance continues to surprise on the upside, with headline growth at a robust 21%. After the recent 75bps rate hike, we do not rule out further hikes. In addition, oil payments are pressuring liquidity, and could also push up rates further.Advance tax figures were good if not superior.

The Indian market now trades at a P/E of 13.5x (P/B of 3x) for FY09E, well below an 18-year average of 15.5x and level with Asian peers.After four years of economic growth of 9%+, we expect a slowing to ~7+% going forward. Maintain focus on Large Caps and stocks with good quality earnings. Telecom, IT Services, Energy and Pharma are likely to be market-performers while Capital Goods [includes Infrastructure] and Autos will remain sluggish. Real Estate and Utilities are likely under performers.

Investors can ADD good quality stocks on Decline. We advise caution to risky sectors like Real Estate.

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