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Footsie with Sensex

india Updated: Sep 20, 2007 22:42 IST

Perhaps it is only a coincidence that Yuvraj Singh slammed six sixers in a single over on the same day as the Sensex recorded its biggest jump to date on Dalal Street. Indians seem to be mixing well the spirit of our favourite sport with our new national pastime of tracking the country’s favourite stock index. However, as in cricket, we would do well to keep a few thoughts in mind as the 30-share benchmark receives optimistic forecasts after crossing the new milestone of 16,000. Just as the Twenty20 tournament is not your regular one-day match or test cricket, a market milestone in itself is best analysed in the circumstances in which it moves up and looks ahead.

There are two aspects of the index that must concern us. One is the underlying performance of the economy and the corporate earnings that rationally determine the intrinsic value of a share, and the other is the surge of liquidity triggered by sentiments on a broader global outlook. Some analysts advise investors to look into a two-year horizon, so that on the projected corporate earnings, the Sensex matches a reasonable multiple of 15 to 17 times the underlying profits of its component shares. On the other side, the latest surge in optimism is triggered by a 0.5 percentage point cut in the benchmark rate by the US Fed to reduce fears of recession in the US economy, considered the world’s growth engine. Global institutional investors shuffle cash around various world markets and withdraw money or stop on their tracks when a big crisis looms, as it happened in July when hedge funds suffered a crunch triggered by a fall in US house prices that hit ‘sub-prime’ loans given to poor-quality borrowers. Foreign institutional investors (FIIs) pulled about $2 billion out of the Indian market between July 25 and August 21 and hopefully, they are ready to keep local stocks in good humour again. But it must be remembered that industrial growth data that arrived last week show a definite slowdown threat and oil prices are being artificially kept low through an administered mechanism, while there is a spike in global crude prices.

These do not augur well for the economy or export competitiveness, though there is still a strong case for the ‘India story’ based on long-term fundamentals. A dash of caution to optimism will thus be just what the doctor ordered for investors seeking wisdom while cricket and stocks are at sixes and sevens.