Indian shares could correct sharply in coming weeks after hitting a series of record highs on unprecedented overseas fund flows, analysts say.
Lifted by a tide of foreign money, Indian shares have climbed 25.4 per cent this year to hit a record 17,291.1 points last on Friday. The rise "has been too dramatic," said Atul Mehra, capital markets head at Mumbai brokerage J M Financial.
"Share valuations definitely appear stretched," he said. Indian shares have risen by over 10 percent just since September 18 when the US Federal Reserve cut interest rates by a surprise 50 basis points, resulting in a flood of money into emerging markets as investors sought better returns.
A key signal of a potential looming correction in the Indian market is that so-called "market breadth" has weakened, analysts said. More shares have lost ground than gained in a rising market for five consecutive trading sessions, suggesting weakness ahead, they said.
"This is the excitement before a climax," key independent Mumbai equity broker Rakesh Jhunjhunwala said. "The markets may rise a bit more, towards 18,000 or even 19,000 points, but there is a huge correction coming." Also price-earnings (PE) ratios, a common measure of whether a share is overvalued that divides the price of a stock by its earnings per share, are looking high, analysts say.
Right now the average price-earnings ratio is 16.8 times which represents "a 15 per cent premium to the long-term average of 14.6 times," UBS analyst Manishi Raychaudhuri said in a report. UBS has its Sensex target for end 2007 at 16,300 points while HSBC Securities is more bearish with its target at 14,250 points.
Foreign funds have invested $12.23 billion in Indian equities in 2007, lured by record economic expansion, beating the previous record of $10.7 billion set during full-year 2005. India logged first-quarter growth of 9.3 per cent, the world's fastest after China.
Investor bullishness on India has been bolstered by the view that the country should escape major fallout from the US subprime credit turmoil thanks to its largely insulated economy. While the nation of 1.1 billion people has been gradually easing rigid state controls on trade and investment and opening up its economy, analysts say it remains far less exposed to global financial upheaval than many countries.
Indian shares have risen nearly 18 per cent since July when significant credit concerns surfaced in the United States. Andrew Holland, strategic investment director at DSP Merrill Lynch in Mumbai, forecast that 2008 would be "a difficult year for equities, including India.
"We could see greater flows in the form of foreign direct investment (FDI) rather than overseas fund flows (into shares)," he said. Political uncertainty also hangs as a question mark over the market, analysts said. The ruling Congress party and its communist allies are locked in a standoff over a civilian nuclear technology deal with the United States which the Left says makes New Delhi's foreign policy subservient to Washington.
"The strongest catalyst to uncertainty in 2008 could be an early general election. Election outcomes are usually sources of significant volatility in Indian markets," UBS's Raychaudhuri said. "In that event, not only could valuations suffer, but the capex (capital expenditure) cycle could also slow temporarily," she said.
How far will the rally go?
The last seven days have been a dream run for equity investors. Even before many investors anticipated the recovery of the markets, the recent 1,000 point Sensex rally has come as a relief. As in the past, new levels are being projected simply because of the momentum in the market place. In such a scenario, those who advice caution may look out of place but here is why one needs to be cautious.
High crude prices
Till a couple of years ago, stock market analysts kept a close watch on global crude prices. But that has been replaced by interest rates, and as a result, the current surging oil prices have been completely ignored. However, one needs to keep an eye on this key raw material which could have a spiraling effect on production costs. Though the consumer has been insulated by the rising prices, the higher costs are being absorbed in the system through other mechanisms. Ultimately, such costs would have to be borne by domestic users.
Interest costs
The interest rate has been the most debated topic in recent months and this got a further fillip thanks to the soft interest rate regime in the US. Interestingly, in India, there has not been much impact on the domestic lending rate with banks continuing to maintain their prime lending rate in the region of 14 percent. In the case of home loans, there is not much change as those who have lowered the lending rates have done so purely for a shorter period of time. Such rate cut announcements have been largely due to the relatively low off-take.
Historic perspective
While it may be tempting to assume that the current momentum and liquidity in the system would carry the Sensex to a new high on a regular basis, history has shown that every momentum rally has been followed by a good corrective phase for a healthy equity market. The current rally may extend up to the results season or even beyond that, but the law of averages is bound to catch up with the Sensex and one can surely expect a healthy correction in the short term.
That should, however, be a concern for short-term investors, and long-term investors will have to keep in mind the volatility. Those who make fresh investments at current levels may have to be prepared for pain in the short term. But in the long term, the Indian equity story remains intact. Not only because the Indian corporate sector has continued to post annual growth rates of over 20 percent, but also because for global investors, the Indian equity market has become a necessary asset class.
Investing in a bull market
The stock markets are brimming with optimism. Money is pouring into the market like never before. The index has embraced unimaginably new highs. For now, it appears that the bull-run is at the horizon. For a true bull market, at least 20-25 per cent of the stocks must be on an increase and that too for a sustained period say two years. An upswing market is considered a good time for the investor.
What sort of a strategy must investors adopt to make it rich in a bull run? It is not unusual to find some stocks faring poorly in a bull market and some doing exceptionally well in a bear market. A bull run implies a booming economy, low unemployment rate, high production of goods, and low inflation.
The market ups and downs follow cyclic patterns.
For now, it is the time of rising index and increasing volatility. In a bull run, investors follow the formula 'buy low and sell high'. It is now time for investors to sell their stocks and book profits. Investors need to make well-educated and investigated investments in the markets.
Mere speculation can prove costly. Suppose in a bear market one stock fares poorly. An investor who has done enough research will know the reason for its fall. There may be something fundamentally wrong with the stock and the company policies.
Or the slide in the stock's price will be a reflection of general pessimism pervading a bear market. If an investor knows that it is the latter, he will stay calm and may be even add more stocks of the company to his portfolio. On the other hand, if he believes that something is fundamentally wrong with the stock, he may decide to sell it and stop further loss.
The scenario holds much the same in a bull market. Some stocks may become highly overpriced. An overpriced stock in a heated market is sure to burst when the bull run ends. Some investors prefer to sell all their shares and make profits. Another strategy is to sell some of the shares and buy back the stock when the price falls back to reasonably low levels.
The value of equities tends to rise fast in a bull run. Predictably, the equity investments in your portfolio will become disproportionately higher. Depending upon your age, objectives and financial obligations, you would have arrived at an asset allocation plan.
In order to stick to the asset allocation, make a judicious down-sizing of the equity component. This will provide ample cushion in case the bubble bursts and markets fall. In a bull run, investigate the real value or worth of the stocks. Do not invest in overpriced stocks. It is advisable to sell overvalued stocks. Exit immediately if you feel the prices have gone up adequately.
Invest regularly. The power of compounding and systematic investment plans goes a long way in wealth accumulation. Finally, bear in mind that there are no permanent bull and bear markets. Disciplined investing and avoiding speculation will help investors
Source - ET
Lifted by a tide of foreign money, Indian shares have climbed 25.4 per cent this year to hit a record 17,291.1 points last on Friday. The rise "has been too dramatic," said Atul Mehra, capital markets head at Mumbai brokerage J M Financial.
"Share valuations definitely appear stretched," he said. Indian shares have risen by over 10 percent just since September 18 when the US Federal Reserve cut interest rates by a surprise 50 basis points, resulting in a flood of money into emerging markets as investors sought better returns.
A key signal of a potential looming correction in the Indian market is that so-called "market breadth" has weakened, analysts said. More shares have lost ground than gained in a rising market for five consecutive trading sessions, suggesting weakness ahead, they said.
"This is the excitement before a climax," key independent Mumbai equity broker Rakesh Jhunjhunwala said. "The markets may rise a bit more, towards 18,000 or even 19,000 points, but there is a huge correction coming." Also price-earnings (PE) ratios, a common measure of whether a share is overvalued that divides the price of a stock by its earnings per share, are looking high, analysts say.
Right now the average price-earnings ratio is 16.8 times which represents "a 15 per cent premium to the long-term average of 14.6 times," UBS analyst Manishi Raychaudhuri said in a report. UBS has its Sensex target for end 2007 at 16,300 points while HSBC Securities is more bearish with its target at 14,250 points.
Foreign funds have invested $12.23 billion in Indian equities in 2007, lured by record economic expansion, beating the previous record of $10.7 billion set during full-year 2005. India logged first-quarter growth of 9.3 per cent, the world's fastest after China.
Investor bullishness on India has been bolstered by the view that the country should escape major fallout from the US subprime credit turmoil thanks to its largely insulated economy. While the nation of 1.1 billion people has been gradually easing rigid state controls on trade and investment and opening up its economy, analysts say it remains far less exposed to global financial upheaval than many countries.
Indian shares have risen nearly 18 per cent since July when significant credit concerns surfaced in the United States. Andrew Holland, strategic investment director at DSP Merrill Lynch in Mumbai, forecast that 2008 would be "a difficult year for equities, including India.
"We could see greater flows in the form of foreign direct investment (FDI) rather than overseas fund flows (into shares)," he said. Political uncertainty also hangs as a question mark over the market, analysts said. The ruling Congress party and its communist allies are locked in a standoff over a civilian nuclear technology deal with the United States which the Left says makes New Delhi's foreign policy subservient to Washington.
"The strongest catalyst to uncertainty in 2008 could be an early general election. Election outcomes are usually sources of significant volatility in Indian markets," UBS's Raychaudhuri said. "In that event, not only could valuations suffer, but the capex (capital expenditure) cycle could also slow temporarily," she said.
How far will the rally go?
The last seven days have been a dream run for equity investors. Even before many investors anticipated the recovery of the markets, the recent 1,000 point Sensex rally has come as a relief. As in the past, new levels are being projected simply because of the momentum in the market place. In such a scenario, those who advice caution may look out of place but here is why one needs to be cautious.
High crude prices
Till a couple of years ago, stock market analysts kept a close watch on global crude prices. But that has been replaced by interest rates, and as a result, the current surging oil prices have been completely ignored. However, one needs to keep an eye on this key raw material which could have a spiraling effect on production costs. Though the consumer has been insulated by the rising prices, the higher costs are being absorbed in the system through other mechanisms. Ultimately, such costs would have to be borne by domestic users.
Interest costs
The interest rate has been the most debated topic in recent months and this got a further fillip thanks to the soft interest rate regime in the US. Interestingly, in India, there has not been much impact on the domestic lending rate with banks continuing to maintain their prime lending rate in the region of 14 percent. In the case of home loans, there is not much change as those who have lowered the lending rates have done so purely for a shorter period of time. Such rate cut announcements have been largely due to the relatively low off-take.
Historic perspective
While it may be tempting to assume that the current momentum and liquidity in the system would carry the Sensex to a new high on a regular basis, history has shown that every momentum rally has been followed by a good corrective phase for a healthy equity market. The current rally may extend up to the results season or even beyond that, but the law of averages is bound to catch up with the Sensex and one can surely expect a healthy correction in the short term.
That should, however, be a concern for short-term investors, and long-term investors will have to keep in mind the volatility. Those who make fresh investments at current levels may have to be prepared for pain in the short term. But in the long term, the Indian equity story remains intact. Not only because the Indian corporate sector has continued to post annual growth rates of over 20 percent, but also because for global investors, the Indian equity market has become a necessary asset class.
Investing in a bull market
The stock markets are brimming with optimism. Money is pouring into the market like never before. The index has embraced unimaginably new highs. For now, it appears that the bull-run is at the horizon. For a true bull market, at least 20-25 per cent of the stocks must be on an increase and that too for a sustained period say two years. An upswing market is considered a good time for the investor.
What sort of a strategy must investors adopt to make it rich in a bull run? It is not unusual to find some stocks faring poorly in a bull market and some doing exceptionally well in a bear market. A bull run implies a booming economy, low unemployment rate, high production of goods, and low inflation.
The market ups and downs follow cyclic patterns.
For now, it is the time of rising index and increasing volatility. In a bull run, investors follow the formula 'buy low and sell high'. It is now time for investors to sell their stocks and book profits. Investors need to make well-educated and investigated investments in the markets.
Mere speculation can prove costly. Suppose in a bear market one stock fares poorly. An investor who has done enough research will know the reason for its fall. There may be something fundamentally wrong with the stock and the company policies.
Or the slide in the stock's price will be a reflection of general pessimism pervading a bear market. If an investor knows that it is the latter, he will stay calm and may be even add more stocks of the company to his portfolio. On the other hand, if he believes that something is fundamentally wrong with the stock, he may decide to sell it and stop further loss.
The scenario holds much the same in a bull market. Some stocks may become highly overpriced. An overpriced stock in a heated market is sure to burst when the bull run ends. Some investors prefer to sell all their shares and make profits. Another strategy is to sell some of the shares and buy back the stock when the price falls back to reasonably low levels.
The value of equities tends to rise fast in a bull run. Predictably, the equity investments in your portfolio will become disproportionately higher. Depending upon your age, objectives and financial obligations, you would have arrived at an asset allocation plan.
In order to stick to the asset allocation, make a judicious down-sizing of the equity component. This will provide ample cushion in case the bubble bursts and markets fall. In a bull run, investigate the real value or worth of the stocks. Do not invest in overpriced stocks. It is advisable to sell overvalued stocks. Exit immediately if you feel the prices have gone up adequately.
Invest regularly. The power of compounding and systematic investment plans goes a long way in wealth accumulation. Finally, bear in mind that there are no permanent bull and bear markets. Disciplined investing and avoiding speculation will help investors
Source - ET
