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Where is the market headed?

india Updated: Jul 13, 2008 22:30 IST

The current market meltdown has left investors shocked and stunned. The only question we ask is, will the markets see more downslide or have they bottomed out? The air is thick with opinions and making up your mind is one of the most difficult tasks at the moment. The Indian economy has posted a growth of 9 per cent in FY08 and the future growth, although slower, is expected to remain at above 8 per cent. So what can we expect? If you believe some simple analysis, you will see that there’s a high probability that the markets will go up from here.

Market dynamics

If we compare the current crash with a similar one in 2000, we can expect the markets to have the same after effects as witnessed eight years ago. Right? Wrong.

Why? Simply because the two situations differ considerably. In the year 2000 the economy was passing through a lean phase while the GDP growth rate at that time was as low as 4.3 per cent. Today the economy is robust, GDP is growing at 9 per cent and India’s growth story is still strong.

Another perspective

Looking at the situation from a different angle, we can expect earnings per share of Sensex companies to remain in the range of Rs 950 to Rs 1,050 levels in FY09 considering 17-29 per cent growth. The Sensex’s current level implies 14.2x – 12.8x P/E of one year forward earnings. Historically, after the dotcom crash, we had seen one year forward P/E of Sensex had remained in the range of 10-22. So, currently Sensex is at lower range of P/E band.

Also, if we calculate the probability of Sensex trading below one year forward P/E of 13.5, it comes to 23.5 per cent. Additionally, in a very sanguine situation we can have FY 09 EPS of around Rs 1,050 according to which, the one year forward P/E turns up to 12.8 times considering current Sensex level. If we reflect on the last 17 years, it is only 11 per cent of the times when Sensex has been below the current level of 12.8 times next year earnings (refer Table 2).

Hence we believe, Q1 results will be keenly watched to gauge the future direction of markets.

Although it is difficult to time the markets, various economic parameters and an analysis of historic market trends are making us believe that the bottom may not be too far away from here, if Q1 results are supportive.

The author is CEO, Invest Shoppe India Ltd.