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Sub-prime cloud passes: More turmoil ahead
BS in New Delhi | September 21, 2007
It would seem that the sub-prime cloud has passed the stock markets by, as the key indices -- the BSE Sensex and the Nifty -- make new highs. Doubts about a global slowdown have also been pushed aside for the moment, and investors are back in the fray with renewed vigour. This is in tune with global stock markets, including those in the US, which have started climbing after the US Federal Reserve cut interest rates by 50 basis points. Markets everywhere have warmed to the promise of increased liquidity.
It is this same liquidity that has resulted in so much money coming to the stock market over the past four years. There have been bumps along the way -- when the UPA government was about to assume office, when foreign institutional investors began pulling out of India in October last year, and when global stock prices fell as crude oil prices surged. There have also been other problems along the way, like the interest surge and the global stock market collapse following the bursting of the US housing bubble.
India has been in a sweet spot for much of this period. The economy has done well, corporate growth and profits have remained good, and the long-term India story has looked attractive right through. So it is not surprising to see the Sensex beat its Asian peers. Except for banks when interest rates were climbing, and exporters today in industries such as software and textiles, there are no troubled spots to be seen. In fact, cheaper imports will benefit many sectors.
Still, it is important to point out that while the Sensex may have climbed by a third in the past 12 months, this merely mirrors the growth in corporate profits during the same period -- in other words, price-earnings multiples have not changed, unlike the period till May 2006, when the market had a more convincing bull run.
What next? It would seem that global investors are increasingly looking at emerging markets as a recourse in case the US slows down. So, there is good reason to believe that India's stock indices will scale a few more peaks on the way. That having been said, it would also be foolish to not recognise that the financial turmoil sweeping western economies will hit more corporate and financial entities, and that there will be a fair sprinkling of bad news in the coming weeks. That will be the next test of the market's resilience.