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Home > Business > Special

Why the markets are on a roll

Rajesh Abraham in Mumbai | October 05, 2007

Global liquidity, which dried up after the turbulence in the US credit markets, has returned big time following the Fed rate cut of 50 basis points on September 18. In the secondary markets alone, FIIs have pumped in over $4.5 billion in about 11 trading sessions, data from the BSE show.

Naturally, this has driven up the share prices to historical highs on a daily basis. The BSE Sensex shot up over 2,100 points (over 13 per cent) since the Fed rate cut.

The rupee, which is appreciating sharply against the US dollar, is also encouraging FIIs to pump funds into India. With the dollar showing further signs of weakness, it is expected that more funds, especially the hedge funds, to pour money intoIndia.

Are Valuations Rich?

The price-to-earnings multiple of 24.13 for the Sensex is a historical high. But as explained by Shankar Sharma of First Global Securities, India can justify a much higher price-to-earnings multiple if China can command a P/E multiple of 40 times.

India, which has comparable economic growth, but much superior corporate governance standards, higher quality of management and transparency in rules, can certainly command a much higher P/E multiple.

"I will not be surprised if the Sensex touches 25,000 to 30,000 in the next 12 months or so," he says.

Adds Sivasubramanian K N, senior portfolio manager, equity, Franklin Templeton: "While the rally is liquidity-driven, long-term fundamentals continue to be strong in terms of economic and earnings growth. We continue to see strong economic growth and the recent advance tax outflows reflect robust business activity."

Areas of concern

Political uncertainty is one factor that can spoil the party. With the Left front is sticking to its guns on the nuclear deal, perhaps the situation can get to a point of no return.

India imports almost 75 per cent of its crude oil requirements. Spot prices of Brent Crude oil (which accounts for 42 per cent of India's oil imports) breached the $80a barrel on July 13 and is currently ruling just under $80 a barrel.

The remaining 58 per cent is the Oman-Dubai Crude Oil, which is also hovering around the $71 level currently.

If the rupee remains unchanged, a $1 rise in the Indian crude oil basket prices will add roughly another Rs 3,000 crore (Rs 30 billion) to the under-recoveries.

If, in the near future, oil price rises are accompanied by the rupee depreciation, the realĀ  economy of the country will be adversely affected, says an analysis by Quantum Mutual Fund.

Pockets of Overvaluation

There are pockets of overvaluation in certain sectors. For instance, the P/E multiple of the BSE Realty Index is 63.81 times.

The P/E multiple of the BSE Capital Goods is 42.22 times. At no stretch, these are cheap valuations.

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