The Indian market has bounced back by nearly 10% from the lows that it had hit towards the end of May; at 17,617, the Sensex is close to the early April highs of 17,970. Once again, foreign institutional investors seem to be driving up prices and while they cashed out in May selling $2 billion worth of stock, so far in June they?ve shopped for equities worth almost $1 billion. So while risk aversion could rise given the uncertainty in some of the economies in the euro zone ? indeed there is an expectation that markets globally could correct by about 10% or thereabouts—the Indian market while unlikely to scale any meaningfully new highs, shouldn?t really see too much of a downside either.
As Bank of America Merrill Lynch (BoA ML) points out, valuations at around a price ?earnings multiple of 16 times forward, are slightly expensive compared with long-term averages. On a price to book basis, the market is trading close to its long-term average of 2.8 times. BoAML believes that with the Sensex likely to be at around 18,000 levels at the end of the year, 2010 could turn out to be a year of consolidation giving investors a single digit return.
Looking ahead, while corporate numbers for 2009-10 were reasonably good and earnings for 2010-11 are expected to grow by about 25% for the broad market, there are concerns that earnings for commodity companies will be downgraded. Thus, the earnings for the Sensex, this year, could come down to Rs 1,000 from Rs 1,050, making the market slightly more expensive. India continues to trade at a premium to its peers in the region; flows into India, Indonesia and other regional markets like Thailand and Malaysia have been turning positive. Korea, for instance, trades at less than nine times forward, Taiwan trades at just over 12 times forward while Malaysia is more expensive at 14.5 times forward. That?s one reason the Indian market may not see any big upside in the near term. The other reason that could cap the upside to the market is the huge supply of paper expected to hit the market in the next six months, estimated at anywhere between $12–$13 billion. So far this year, close to $10 billion has been raised by companies through IPOs, QIPs and so on.
However, if the supply of paper turns out to be higher, at say $15 billion, which is more than 1% of India?s market capitalisation, then money will move out of the secondary markets. The government is expected to be the biggest borrower with the Coal India issue estimated at Rs 15,000 crore.
Of course, it?s not necessary that investors will trade stocks that they hold for new stocks. Indeed, the key to the success of many of the issues will be pricing; with a flood of paper issuers cannot be asking for very high valuations. The government, in particular, needs to leave enough money on the table for investors, if it wants to raise the kind of money that it?s looking to. On top of that it would need to offer smaller investors attractive discounts?more than the 5% that it has been giving so far?if it wants them to buy shares in its companies.