Sensex PE at 12.3, near bottom

If one cliché were to sum up the current market conditions, it would have to be: “There’s an opportunity in every threat.” A cliché is possibly the worst way to drive home a point, but inspiring quotes are par for course in this environment. One domestic brokerage’s strategy report opens with a rather dismal Woody Allen quote: “More than any time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness, and the other to total destruction. Let us pray we have the wisdom to choose rather correctly.” This is followed with a spate of inspiring quotes on how even the worst crisis does tend to pass and that it is darkest before dawn.

So, will a new dawn break for the Indian markets? While there’s no definite answer to this one, what is clear is that after the sell-off in May, exuberance seems to be returning to the market, as valuations have dipped to levels seen during some of the biggest crises over the past 25 years. History shows that in bear phases, stocks are hammered irrespective of their performance. And, when investors exit en masse, even quality gets battered, says Enam. That’s what seems to be happening at this point in time. In the process, the price/earnings multiple of the Sensex has dipped from its historical average of 15x to 12.3x. The price/book valuations have also fallen to 39-month lows, says Nick Paulson-Ellis, country head of Espirito Santo Securities.

The Sensex PE has touched such levels on a few earlier occasions. For instance, after the nuclear test in 1998 and imposition of sanctions, it touched 13x and after the Lehman crisis it touched 10x. Enam Securities, which has done this analysis, says: “Crisis invokes self-correcting institutional action. This, along with our demographic trajectory and under-valuations, inevitably attract capital again. So, ‘everything seems hopeless’ turns into ‘everything look great’ as the rupee, fiscal and current account deficit simultaneously improve.”
 

If crude oil stays below $100/bbl, gold imports moderate by 25 per cent this year and there is a fresh round of liquidity injection by the US and Europe, then the rupee could appreciate, believe experts. Wednesday’s rally suggests the market is waking up to this opportunity, as the rupee may strengthen by the end of the year. In the worst case scenario, the rupee is not expected to go below 57. Enam expects it to be around 51 by the end of FY13, while Espirito Santo’s Paulson believes its fair value is close to 50. Clearly, even on the currency front, concerns are overdone.