economic & strategic outlook - india
indian stock exchange performance
secular bull run
• Global : The Indian stock market grew at a CAGR of 37.5% over the past four years. The long-term view of the market remains bullish.
Global Investment House –Economic & Strategic Outlook-India - Stock Exchange - The Indian stock market continued its positive momentum since the past two years despite domestic and global pressures. The robust macroeconomic outlook coupled with encouraging policy initiatives by the government, buoyant investment climate, strong investments by FIIs, and impressive financial performance of Indian companies were the main factors that boosted the market sentiment in recent years. The buoyancy in stock market continued despite the inflationary pressure and hardening of interest rates.
The Indian stock market grew at a CAGR of 37.5% over the past four years. The market, which witnessed a strong rally in 2005-06, continued its winning streak in 2006-07 as well. The BSE Sensex posted a return of 15.9% in 2006-07 on top of 73.7% in 2005-06. The S&P CNX Nifty also recorded a gain of 12.3% in 2006-07, over and above the gain of 67.1% in 2005-06. Though the market was up in 2006-07 there were some anxious moments which resulted in heavy selling pressure in the market. The market dipped to 9,920 level in Jan 2006 in view of the global concerns such as rising interest rates, high oil prices and likely slowdown in US economy. However, the market bounced back in subsequent months on the strength of buoyant Indian economy. The market recovered impressively by 21.4% to reach at the level of 12,043 in April 2006. However, within a month the market again faltered and dipped by 13.7% in May 2006 to reach at 10,399. Since then the market recovered gradually with benchmark BSE Sensex crossing 14,091 in January 2007. The global concern again forced the market to retraced back to 12,938 in February 2007, representing a decline of 8.17% in a month. However, with the positive news flow of strong industrial numbers, better corporate performance, and rising liquidity pushed the market again on a growth path with the Sensex rising consistently since then. The rally in the stock market during the last one year was spread across mid-cap and small-cap companies as well. The broad-based BSE 500 index increased by 35.8% on a point-to-point basis in May 07. The major sect oral indices registered gains during 2006-07 in line with the generally upbeat sentiment in the stock market.
FIIs flocking to India…
With the unfolding of the India story, Foreign Institutional Investors (FIIs) evinced keen interest in the Indian capital market. FilIs flocked to Indian market not only from the traditional geographies like USA and Europe but also from the Middle East and Far East region. Number of FIIs registered with regulatory authority swelled to 1,047 as of June 22, 2007 as compared to 924 during the same period of the previous year. The cumulative FII investment in Indian stock market ballooned to US$53.6bn as of June 22, 2007 as against US$43.8bn in June 2006.
India eighth largest IPO market…
As per the study conducted by E&Y, Indian companies raised US$7.23bn from the domestic capital markets in 2006, making the country the eighth largest issuer of equity capital in the world. Chinese companies raised a whopping US$56.6bn, which was the highest amount raised in 2006. China was followed by US companies with total proceeds of US$34.1bn, and Russian companies with US$18bn in raising funds. Worldwide IPO activity in 2006 raised total capital of US$246bn.
Market reasonably valued despite sharp run up…
The price-earning (P/E) ratio of BSE stood at 20.78x at the end of June 22, 2007 with a market capitalization of US$1,005bn. Despite an increase in stock prices, the price-earning (P/E) ratio remained generally attractive due to an increase in corporate earnings. We believe that as long as the index PEG is less than one, there is no need to fret over the market. Although the P/E ratio of the BSE Sensex is higher than other emerging markets, historically, the ratio is much lower as compared to its own high in the past. Some amount of premium to the Indian market is justified as compared to other emerging market since India is growing at around 9% p.a. and the growth momentum seems sustainable. The price-book value (P/BV) multiple of BSE stood at 5x at the end of May 2007. The dividend yield of the 30 stocks comprising BSE Index was 1.2% as of May 2007.
In the longer term, the market seems to be in a secular growth trend. However, in the short-term, concerns remain on higher interest rates, firm rupee and less liquidity. The liquidity is drying up in the secondary market in India on big issues, and bond investments, etc. On interest rate front, we believe that RBI is likely to keep interest rate rise on hold for some time. Currently, the Indian market is at fair levels and we see support at the 14,000 level. The major risk is that the higher interest rate environment could hit corporate earnings growth.
We are rather neutral on India right now. India has witnessed a very good run in recent months. But we are a little worried about it in the short-term, probably up until the end-July. There has been a huge surge of new issuance, which means the liquidity is likely to dry up. We have got interest rates that have moved higher and there are some questions about earnings.
Currently, the Indian market is trading at a one year forward P/E of around 17x. The long-term view of the market remains bullish buoyed by the strong economy, rising income levels, huge investments in infrastructure, encouraging policy initiatives by the government, etc. If India can make a successful beginning with the proposed modernization of its pension industry, that will provide big boost to the Indian stock market.
