Sensex at 21000: Is the economy picking up?

 The Sensex is flirting with the 21000 mark after three years.

While most traders are rejoicing the early onset of Diwali, the macro-economic fundamentals are much weaker now then in 2010-11. Stock market returns are all about future growth in profits. Although the valuation is cheap, the external environment is a cause of concern.

Here are some tell-tale signs:

1) FII flows slowing:  Foreign institutional investments drive prices for the Indian equity market. FII buying and selling trends are often used to determine the direction as they control a sizeable chunk of the free-float or non-promoter holding in listed Indian companies. According to the SEBI data, these inflows have slowed. FIIs invested Rs 1,10,000 crore in Indian equities in 2010-11 versus Rs 70,000 crore up till September 30, 2013.

2) Valuation cheap: Price to earnings ratio is the market price divided by the company’s net profit per share represented by EPS or earnings per share. Forward price earnings multiple indicates expectations are low on corporate profitability going forward. In November 2010 when it hit 21000, the Sensex had a forward price to earnings ratio of about 20. In October 2013 as it hovers at 21000 yet again, it is at a PE of less than 15, according to estimates by Credit Lyonnais Securities, a global securities firm.

3) No premium to India: In November 2010, the Price to Earnings (PE) ratio of the Sensex was at a 20% premium to most Asian emerging markets. Currently, Sensex PE is at par with and in some cases below its Asian peers. This shows that foreign institutional investors are not willing to give India a higher valuation in comparison to Asian peers.

4) Sector leaders: In 2010, when the Sensex crossed 21000 - financial and banking sector stocks led from the front. In 2013, financial sector stocks like banks are the worst performers. The rally, this time is led by FMCG, IT and pharmaceuticals.

5) Slow growth: GDP or gross domestic product grew by 9.3% in 2010–11. It has nearly halved in the last three years. The Indian economy grew at 4.4% in the first quarter of this fiscal. The government is looking at a GDP target of at 5-5.5% in FY 2013-14.

6) Weak rupee: The Rupee slipped to all times lows versus the US dollar in 2013 and is the worst performing currency amongst all emerging countries. The INR threatened to hit the 70 to a dollar mark earlier this year and currently hovers around the 61 to a dollar level. In 2010, the Rupee traded at 45 to the dollar.

Rupee’s worth against key currencies

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1 USD = 68.23 rupees

Photo – ThinkStock

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7) Deficit: Current account deficit (CAD) spiraled as the rupee declined to its lowest ever. India’s current account deficit is at 4.9% in quarter ended June 2013. It is the highest in the world amongst emerging markets according to a Morgan Stanley report. Current account deficit occurs when a country owes more foreign exchange to the world than it receives. The RBI aims to contain the current account deficit at 3.7% of the GDP in FY2013-14. In the financial year 2010-11, CAD was at 2.7% of GDP.

8) Inflation high: Headline inflation in the country based on wholesale prices, has remained above 4% since 2009. In 2010, wholesale price inflation hovered around the 9% mark. In September 2013, Wholesale Price Index or WPI was at 6.46%, its highest level since February 2013. Food inflation, which accounts for over 14% of the WPI, has been elevated since December 2010.

9) Interest rates firm: Inflation is a major cause of worry for the RBI as continues to hold rates high. The repo rate set by RBI hovered around 6% three years ago. Today, it is 7.5%. This increased the interest rate burden on borrowing by companies and cut their profitability. There are no clear signs of interest rates going down soon.

10) Industry output slow: The Index of Industrial Production (IIP) a measure of industrial activity and output grew at a measly 0.6% in August 2013 versus 2.8% growth in July. IIP grew at 6.4% in November 2010 when the Sensex last hit 21000.

 11) Business confidence low: Business Confidence is at an all time low as a result of policy uncertainty, regulatory hurdles, land acquisition delays and bottlenecks to project clearances. High interest rates and uncertain demand environment are added woes for the industrial sector. Industry lobby CII’s Business Confidence Index indicates that corporate sector confidence continues to remain on a weak footing and from a high of 66.7 in FY2010-11; it has fallen to a low of 51.2 in the first quarter of 2013. This work is produced by Simplus Information Services Pvt Ltd. Customer engagement through content.

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