 "Expect Sensex to take more dips soon")
If signals from stock broking firms tracking Indian equity markets are any indication, benchmark indices are headed for a slide of at least 10 percent.
Two weeks ago, securities firm Ambit Capital argued that the Sensex could fall to 16,000 by June 2011. Many analysts and pundits were and are still in denial mode. Many of Ambit’s clients sought more information on why the firm believes that the Sensex could fall to that level when it is at over 18,000 now?
With some assumptions, here is the argument that the firm made:
The Sensex forward price earnings multiple currently stands at 14.7. This means the value of the sensex is 14.7 times the cumulative earnings per share of 30 companies that form the BSE sensex. When international institutional investors look at India, they look at Indian equities performance in comparison to other markets. Institutional investors use indices of MSCI, an agency that manages regional and country-specific indices to make that comparison. Traditionally, Indian shares traded at a premium of 28% over MSCI Emerging Markets (EM) index. So if the MSCI Emerging Markets index traded at 10 times forward earnings multiple, the BSE sensex would trade at 12.8 times forward earnings multiple.
[caption id=“attachment_12184” align=“alignleft” width=“380” caption=“Foreign institutional investors have pulled out nearly $800 million from Indian equities since January 2011. Photo by Wayne Silver”]
[/caption]
The current MSCI EM markets forward price-earnings multiple is 10.8. The BSE sensex is trading at 14.7. This means a premium of 36% over MSCI EM index. Ambit believes that this has to come down to 28% premium that traditionally Indian equities get. So the multiple to be given to the Sensex should be 13.8.
To add to that earnings of Indian companies are hit by rising finance, fuel, labour and input costs. This means the consensus EPS of Rs 1,254 is at risk. Ambit believes that after taking this into account, the cumulative Sensex EPS should be Rs 1,169.
This takes the estimated fair value of the sensex to 16,160.
Why this is important for everyone to understand?
Foreign institutional investors control half of the free-float shares for BSE 500 companies. This means half the number of shares are held by people other than company promoters. They have pulled out nearly $800 million from Indian equities since January 2011. The impact of this is clearly visible. The MSCI India index fell 1.5% since January 2011. The MSCI Emerging Markets index is up 23% during the same period. FIIs clearly prefer markets other than India.
If one goes by the survey of fund managers conducted by Bank of America-Merrill Lynch, most fund managers are slowly beginning to make allocations to emerging markets but do not prefer India.
This market is surely for lion-hearted people. Predictions by analysts are based on circumstantial assumptions. Share indices may not touch the most pessimistic or optimistic levels predicted by pundits. The market could begin the upward or downward journey at a level above the predicted bottom or below the top. The other side of the story is articulated by Arjun Parthasarthy in this column .