After the gut-wrenching fall of the last few weeks, there's a lot of surprise that value buying has still not emerged. After all, the Sensex has lost over 30 per cent from its all-time high. That is just one way of looking at it. The other way is that the clock has simply been turned back to July 2007, when the Sensex was at 14,900 as well. A mere eight months back. It is instructive to shed the baggage of 21,500 Sensex and examine whether things are so dramatically different from that period. The index was trading then at an 2008-09 PE- two quarters forward- of around 17 times. GDP growth was about to come in at above 9 per cent and earnings growth at 25 per cent.
Today we trade at a PE of 15, four quarters forward on 2009-10 earnings, which are expected to grow at 18 per cent, and GDP at 8 per cent, with confidence in both these numbers eroding with every passing week. Inflation was at 4.4 per cent in July 2007, it is 5.1 per cent today, and the global situation is far worse now with the US about to enter a recession. Does this count as such a substantial "derating" of our market, given the environment? I doubt it very much. The short point I am making is that it may not always be prudent to jump into buying stocks simply because they have fallen a lot from their peaks. Just a few months back, we were in "saner" markets and these levels would not have appeared to be so screamingly low then.
The point about July is also important as between July 2007 and now domestic mutual funds have seen net inflows of $7 billion. If you add portfolio management service or PMS flows, the number would be much higher. Most of these investors would now be under water; their investments are in the red. Significant redemptions have not happened yet but they have started and I hear rich individuals are already queuing to take money out of large PMS products. This is inevitable, as it would be the natural inclination of any individual now to preserve whatever profits he has or cut losses. This may explain why mutual funds have not been aggressive deployers of their cash holdings in recent weeks.
The screen is shouting that something is terribly wrong with the market. Now, the market is not always right; 21,500 was clearly a mistake, an aberration. I hope and pray that what we are seeing now is simply a case of the pendulum overcompensating on the other side. Yet sometimes the screen does not lie, it tells you about cancers that crop up much later. Something in my gut does not feel right, I truly hope it is a false premonition.