Straight from the Specialists
When will Sensex cross 20,000 again?
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The Sensex jumped 465 points on 25th March to close at a two-month-high of 18,815. That was in response to economic recovery in the US and better performance by IT companies. Another 5 percent jump can take the Sensex to 20,000. How soon can that be?
The Sensex had crossed its previous peak in September 2010 but had retracted in subsequent months. Partly it was because of the assessment that stocks were over-priced. The P/E ratio had touched 20 which was far in excess the P/E in most other markets. In Taiwan it was 15, in Philippines 14.6 and in South Korea 13.6.
Sensex dropped possibly for other reasons. First, the FIIs pulled out $2.2 billion partly for fear of inflation which had touched 8.7 percent and fall in industrial growth to 3.7 percent (January). This had prompted the RBI to jack up the interest rates which would have induced some shift from shares to bonds.
Second, the Indian companies’ January-March performance was not as good as in the last quarter of 2010. Third, the rupee depreciated lowering the return in terms of dollars.
The whole of January and February the Sensex gradually climbed down from over 20,000 to 17,825, pulling the P/E to 17. The budget, however, was a good trigger and kicked up the Sensex 5.8 percent in four days. But the rally survived only two weeks to bring the Sensex down again by 3 percent in mid-March.
Since then the market has been in a stalemate until 25th March when the Sensex jumped led by aggressive buying of IT, banking and realty stocks.
With P/E now at 17.3, Indian stocks appear to be a good buy and should attract FII investment. The P/E is less than in Indonesia, nearly equal to in New Zealand, Taiwan and Australia. The difference in P/E ratios between India and many other Asian countries has also narrowed.
P/E cannot however be looked at in isolation but has to be corrected for growth in corporate profits. This growth now is expected to be 20 per cent in Q2 2011. That will take the P/E corrected for growth (P/E divided by growth rate) to less than 1.
That means that stocks currently are under-priced and are a good investment.
There are other favorable factors as well. Inflation is likely to drop to 7 percent in March, interest rates would stabilize, additional production capacities will be operationalised and industrial growth will pick up.
The growth prospects should be even better if the monsoon turns out to be normal. This has been a good trigger in the past and will be watched more intently this year.
If the monsoon arrives in time, precipitation is adequate and distribution is good, the Sensex will jump once again. For, the monsoon significantly influences food inflation, growth of agri-industries, exports and consequently the GDP.
June therefore should be the time when the Sensex should cross 20,000 if the monsoon is normal.
(The above article is not intended to be a financial advisory. Readers must seek specific advice from experts before making investment decisions.)