The first-quarter results for financial year 2009-10 show better-than-expected earning numbers for India Inc on the back of better operational efficiency, stake sales and low commodity prices. But demand growth and sales have continued to remain sluggish in the first quarter. Given that, is the current price-to-earnings (PE) multiple at 20.35 for Sensex companies justified by fundamentals or is there some ?bubble?? The current PE is still lower than the figure of 25 it had hit in December 2007 when the market was trading at 20,000 points, but the rapid rise in the PE multiple since April is still noteworthy. Clearly, if earnings don?t grow as fast as share prices, the PE multiple will bloat, which is always a predictor of a market slump. China may have already been there partly?after a steep rise in the stock market, the Shanghai index slipped 5% last Wednesday triggered by the massive sell-off in Chinese stocks. It was sparked by concerns over banks capping their lending targets and pricey valuations, after the country?s banking regulator instructed banks to ensure that loans flow into the real economy rather than into stock markets and real estate. The authorities fear that a large chunk of the money from recent stimulus packages has entered these assets, as with China State Construction Engineering Corp?the world?s biggest IPO in recent times?and BBMG Corp, were heavily subscribed. Various reports suggest that IPOs worth $45 billion are in the pipeline in China, fuelling foreign investors to ramp up investments. In fact, EPFR estimates that investors globally ploughed a record $35.5billion into emerging market equity funds in the first half of the year, and withdrew $61billion from developed market equity funds over the same period.
The Chinese trigger had a ripple effect on Indian equities too, with the Sensex dropping marginally 160 points on that day. Analysts fear a build-up of bubble in the Indian market with the MSCI Index?formerly Morgan Stanley Capital International, which is used as a common benchmark for global stock funds?rising around 58% since January, the fastest ever in any emerging economy. On the other hand the MSCI rose just 10% since January in developed countries and this disparity between developed and emerging markets has prompted analysts to talk of corrections, particularly in India and China. Also, for the second time in almost 15 years, price-to-book values show that the Indian stock market offers a premium valuation compared to developed market equities valuation. Retail investors are getting out of the market after booking profit in the current rally. That makes prospects of a bubble larger. Should anything be done about this? Not really. If FII money has ?over-invested? in Indian stocks, there will be a correction. There?s no parallel as yet with China of bank lending flowing into stocks. But even if there were, the case for heavy regulatory intervention is still not made.
