Editorial: Sense and Sensex

Nov 01 2013, 10:50 IST
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SummarySensex: Liquidity is king, who cares about fundamentals?

The Sensex closed at a lifetime high of 21,033.97 on Wednesday and scaled that peak on Thursday ending the session at 21,164.52. Much of the move coincides with the global rally in equities—European stocks are at a five-year high—which, in turn, is being fuelled by the prospect of a delayed taper by the US Fed and, consequently, lots of liquidity for a longer time. The global ‘risk on’ trade has meant strong foreign inflows into India—foreign institutional investors (FIIs) have been buyers for now and the tab for the year is $16 billion. What has worked to India’s advantage is that fund managers have downgraded China which they believe is expensive. Moreover, while they acknowledge the macroeconomics remains in something of a shambles—no one really sees the capex cycle turning soon—they’re focusing on the silver linings. That the rupee has stabilised at levels close to 62 against the dollar and isn’t continuing to depreciate has much to do with the optimism as has the fact that the Reserve Bank of India (RBI) has reversed some of the measures it put in place in July to tighten liquidity to fight the falling currency. That the current account deficit could come in at a much smaller $55 billion than the earlier estimated $70 billion is a plus as is the fact that exports are doing better. The good monsoon—the best in 15 years—should keep rural incomes robust and create demand for both staples and durables while the beginnings of a recovery in Europe, analysts believe, will be a boost for companies like Tata Steel.

So, while corporate earnings remain weak in the aggregate—with the weaker rupee driving top line—not too many companies have reported numbers for the September quarter, which are below estimates. And there are pockets of good performance not necessarily driven by a depreciating currency. Had there not been the rush of money, analysts might have dwelt on the fact that loan growth is crawling—sanctions in Q1FY14 were just 0.5% of loans—and that interest rates are rising. Indeed, it seems counter-intuitive that companies can do well at a time when interest rates are headed up, little investment is taking place and high inflation is eating into household spends. But, with cash to deploy, investors are brushing aside weak order-books and falling realisations for cement producers and smaller volumes for FMCG firms. After the run up to 21,205, the Sensex is now trading at just under 16 times estimated one-year forward earnings, a multiple that’s higher than the long-term average; it would have been more expensive but for the fact that earnings have been upgraded thanks to the sharp rupee depreciation. Within its peer group, India is more expensive than Korea, but a little cheaper than Taiwan. While the Sensex’s move from 15,000 to 21,000 was driven by a handful of stocks from the IT, private sector banks, auto, energy and pharma sectors, many of these have now become very expensive. Which is why cheaper stocks like those of PSU banks, where asset quality looks like it isn’t going to worsen, might now get a look in from funds. Till they run out of money.

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