Even the most bullish of investors must be getting a touch of vertigo as the Sensex races towards the 20,000 mark. It was in January 2008 that the Sensex crossed 20,000 for the first time and at 19,906, we?re less than a 100 points away. The world was a different place then because the Lehman debacle hadn?t happened. The big difference today is that the outlook for growth globally is far less rosy than it was then with some economies in the western world on the brink of sovereign default. Money wasn?t sloshing around in the kind of quantities, as it is right now, with most governments forced to hold on to an accommodative monetary policy, though there was the yen carry trade, pushing money into emerging markets.
Back home too the macro environment was probably somewhat more friendly at the time in that inflation, especially food inflation, was nowhere close to today?s levels. To that extent there wasn?t the nagging worry that interest rates could move up by 50-75 basis points. So, if not everybody is comfortable with the market it?s understandable. To begin with, there?s reason to be cautious because in relative terms the market is way more expensive than it has been in a long time; as Morgan Stanley points out, India?s 12-month trailing PE premium versus emerging markets, at the end of August, had increased to 60%.
However, FIIs are apparently comfortable buying Indian equities at these valuations, obviously believe that the India story is a good one even at these prices. It?s possible that emerging markets will be re-rated as Philip Poole of HSBC had observed a couple of weeks back because countries like India will continue to grow at a must faster pace than peers in Asia in the next few years. But since the world will grow at a much slower pace in the next three or four years, there?s every chance that nations like India, which may have grown at 9% would grow at around 8% instead because the correlation to the global economy is certainly higher than it was five years back. The Fed is expected to lower its growth forecast for the US on Tuesday. While 8% is undoubtedly a scintillating number compared with 2% or 3%, there are some concerns in the near term the biggest of which relates to earnings growth which is in moderation mode. India Inc?s June 2010 quarter numbers were below expectations resulting in more downgrades rather than upgrades. While demand for products such as cars remains robust, prices of commodities remain high?steel players are threatening to hike prices while copper is hitting new highs. So contrary to what was anticipated in July, prices of commodities haven?t really come off and could keep margins under pressure. A strengthening rupee can only hurt exporters though other Asian currencies too have been gainers. Also money is becoming expensive;Yes Bank has already hiked lending rates by 50 bps and others could follow, so that smaller customers, reeling under high inflation, may stay away from banks. Firma too don?t seem to be in any hurry to borrow; a sub-20% growth in credit offtake, on a relatively small base, at a time when the economy is booming, isn?t comforting. The September quarter numbers will tell us how well corporate India is really doing.