Shaken Sensex stirs to life

Mumbai: Bears left the stage on Tuesday, allowing the markets to bounce back. The Bombay Stock Exchange Sensex, after some anxious moments of high volatility, closed the day with a clear 341-point gain, allowing Finance Minister P Chidambaram to tell Parliament that “calm and order appear to have returned”.

That’s no guarantee that the markets will remain strong. The debate over market direction in the short term remains inconclusive. One view is that the recent drop makes India attractive for investment; the opposing view is that India is still overvalued relative to other emerging markets.

The third  opinion is that the market will stay firm in the short term because it overcorrected on Monday following the forcible squaring up of speculative positions due to margin calls.

A Citigroup report dated May 22 is positive on the markets. “The Indian stockmarkets have witnessed a sharp decline recently, with the BSE Sensex down 15% in the last seven trading days. Cool-off in asset markets notwithstanding, we maintain our positive stance on the Indian economy and reiterate our GDP growth estimate of 7.6% in fiscal year 2006-07,” it says.

But JP Morgan has maintained its underweight recommendation on Indian equity. Adrian Mowat, chief Asian equity strategist of the investment bank, says India’s current account deficit (largely due to high oil imports) and stock values are areas of concern.  

The Sensex currently has a price-earnings (P/E) multiple of 19, which means stock prices are 19 times current corporate profits. Hong Kong’s P/E is 12.27, Pakistan’s 16.57, and South Korea’s 11.40.

Mowat believes a fair value of the Sensex would be around 11,000 by year-end. With the index closing at 10,823 in Tuesday’s relief rally (and the Nifty at 3199.35 points), it leaves little scope for any appreciation until March 2007.

For the short term, though, the sentiment is positive. “With overall volatility being high, the bounce-back can also be expected to be a large one in the short term,” says Deepak Mohoni, who watches stock technicals closely.

“The Sensex could go up by another 500-600 points in the next couple of days. Though there will be good short-term trades on the buy side, we have advised clients to reduce their long-term holdings during this rally.”

Mohoni’s caution is understandable given the uncertain signals thrown up by trading activity in recent days. For one, foreign institutional investors have been selling heavily despite the finance minister’s claim that they may be buyers.

Between May 11 and 23, they sold Rs7,100 crore worth of stocks on a net basis. Indian mutual funds have managed to soak up only half the sales, buying Rs3,623 crore net. This explains the weakness of the markets.

Another negative signal is the low volumes accompanying the Sensex’s rise. On Tuesday, despite a 3.25 per cent gain in the Sensex, the market’s overall trading volumes were low at Rs11,833 crore.

In contrast, on Monday, when trading was suspended for an hour, the market’s traded value was Rs13,858 crore.

Some market analysts feel that a large part of Monday’s fall was on account of margin call pressures and other systemic shortcomings of the Indian markets.

“Whatever was lost due to margin call pressures will be regained in the next few days,” says one analyst.

JP Morgan’s negative view of India stems from comparisons with other emerging markets.

“With the exception of Chile, all other emerging markets are cheaper than India. But we expect corporate profits to grow in the region of 15-20 per cent, which is stronger than other emerging markets if one leaves out Taiwan,” says Mowat.

A technical analyst at a local broking firm says Tuesday’s pullback could hold. If the markets cross three Nifty resistance levels of 3320-3330, 3325-3335, and 3430-3440, the worst could be over.

“The downside risk seems to be over,” he says. “If these (upper) levels are breached one by one, the chances are that the markets will hold.” He is relatively optimistic and says the chances of the market falling further are about 30 per cent.

Mauled bulls will surely be hoping he is right.