In the PM-FM avatar, Manmohan can reverse the damage done so far. If successful, the bulls would be attracted back to the low valuations of the Indian market.
Thirtieth June. It is half-time of the year, an interesting juncture to take stock of the market. The Prime Minister Manmohan Singh is back in his previous job, as the finance minister albeit as an additional charge. During his stint as FM, he was known for changing the direction of the Indian economy.
As he moves to the centre stage, it is not clear whether he is holding the post strictly as an interim arrangement or he will keep this crucial portfolio right through to 2014. Obviously, if the latter, he can take direct charge of the fiscal policies that have put the Indian economy in a mess and set a depression in the markets.
The change of guard in finance ministry, has changed the overall perception of the Indian market. Singh, has once again started creating the necessary feel-good factor with visibly measurable actions that can make foreign institutional investors feel comfortable on the tax front. Their discomfort acted as a major dampener of sentiment during Pranab Mukherjee’s tenure, which Mukherjee refused to acknowledge.
Markets, to a large extent, move on the basis of sentiment, feel-good factors, pro-active policies and overall environment, which includes global cues and economic conditions. In India this seems to have started to happen and if it gathers momentum, will augur well for the next ‘bull’ run.
What is less publicised is that the Indian equities market is the second best performer among emerging markets in local currency this year so far. In dollar terms, India has done better than all large emerging markets – China, Brazil, Korea and the MSCI Emerging Market Index. Despite being bearish on India, FIIs have so far, in the first six months of the year, invested $8.6 billion – 56 per cent of FII inflows into Asia. Morgan Stanley has upgraded Indian equities to ‘equal weight’, in a recent report titled Asia Strategy, after being ‘underweight’ since the first quarter of 2011.
According to the global investment bank, Indian markets are now trading at a price-to-book multiple of 2.1 times, close to the trough valuations of two times in the 2002 and 2008 cycles. Thereafter, Deutsche Bank upgraded Indian stocks saying the market is close to its cheapest in two decades from an EBITDA and sales perspective. Deutsche Bank’s India strategists have an end-year target for the Sensex of 18000 points.
There is good reason for Morgan and Deutsche to feel so. Currently, the Sensex price to earnings (P/E) at below 15 times is much lower when compared with a P/E of about 23 times in 2008. This suggests that even when the sub-prime ripple was making waves, the Indian stock market showed much resilience and traded at the premium valuation in 2008. From then to now, when the dangers of the sub-prime crisis have been crossed by us successfully, and keeping in mind the long- term potential of India’s growth story, the current valuations of the Sensex are much lower when compared to the long-term average valuation of about 18 times earnings. This makes the Indian markets attractive from a long-term perspective.
For a sustainable ‘teji’ (bull) market we need to see some policy announcements which should be backed by effective implementation. With the change of guard at the helm of the finance ministry, one still sees a great possibility, and can be hopeful that the government will convert its recent statements into action especially to attract foreign investment flows into the country. This is important since it is FIIs that currently drive prices. In the earlier crisis time of 2008-09, the government announced the stimulus package and complemented the same with monetary policy measures. It needs to repeat the same.
Now, since the first day the PM took on the dual role, he has started taking proactive measures, and the impact on the market is evident from day one. In order to see the sustainable change in sentiments, and to once again gain the confidence of investors, the FM will have to focus on fiscal consolidation, remove regulatory bottlenecks, push reforms, address trade imbalance and improve supply side impediments to tackle inflation and drive long-term investments into the country.
Finally, though a global financial crisis is still prevailing, India’s long-term fundamentals are still strong. And with the market at the nadir, there is only one way to go – up.
This article was originally published in Business India Magazine.
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