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| Local woes |
| Jitendra Kumar Gupta / Mumbai Aug 17, 2009, 00:33 IST |
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Even as global sentiment is improving, domestic concerns may limit any near-term upside in the markets
Despite the better-than-expected corporate earnings for June 2009 quarter and positive global cues, markets haven’t reacted positively. That’s because, concerns over the impact of monsoon and swine-flu persists, which experts believe could play a key role in providing a direction to markets in future. “Today, the prime concern for the market is monsoon, which is likely to stay for some time as the impact is still not factored in fully,” says Sanjay Sinha, CEO, DBS Cholamandalam Asset Management Company. Besides below normal monsoons, which could negatively influence domestic demand and GDP growth, swine flu is considered an emerging concern.
“The situation has really changed in last ten days thanks to drought and swine flu. If the swine flu gets very serious then there would be some serious problem for the markets. It is difficult to quantify the impact, but it would create uncertainty which is not liked by the market,” says Ramesh Damani, member, BSE.
The monsoon effect
Till some time, everybody was in a wait-and-watch mode over the monsoons’ progress and its likely impact. However, things now seem to be clear and that is why many analysts and economists have downgraded the GDP numbers reflecting their concerns over demand. “At this point in time, the sentiments are very fragile and we are just recovering from the bad phase. If the monsoon worsens from here, it is going to hit rural demand and business sentiments,” says Yashika Singh, head economic analysis, Dun & Bradstreet.
So far, estimates indicate a 29 per cent deficit in rainfall. More importantly, 70 per cent of the regions are reported to be facing deficit rainfall with many areas declared as drought affected. In worse case, it is likely that we might record a GDP growth which is below 6 per cent for 2009-10,” adds Yashika Singh.
The progress of monsoon is critical considering that a large part of the arable land is dependent on rains. Also, considering that over 60 per cent of India’s population resides in rural areas and about 46 per cent of rural-folk is employed in agriculture, it could have a ripple effect on GDP growth and overall rural demand.
“While the overall national agriculture is not at the same level of risk as it was in 2002, some states definitely face a grave situation. This will definitely shave off some part of the GDP,” says Crisil in its recent note on monsoon and its impact. No wonder that organisations like The Centre for Monitoring the Indian Economy (CMIE), which tracks economic activities, has scaled down India’s GDP growth to 5.8 per cent for 2009-10 compared to its earlier estimate of 6.6 per cent.
Earnings & valuations
Lower growth implicitly also indicates increasing risk to corporate earnings. For June 2009 quarter, the Sensex companies reported a 3.1 per cent decline in sales and 4.8 per cent decline in net profit. The results were still considered to be better compared to analysts’ estimates as well as the larger fall witnessed in preceding quarters of December 2008 and March 2009. While the results bought some cheer, analysts are now concerned about the impact of monsoon which could be felt in the coming quarters. “We might not see the actual impact of monsoon today or in the quarter ending September 2009, but there is a growing risk for earnings getting downgraded in the second half of the year 2009-10,” says Ajay Parmar, head of Institutional Research, Emkay Global Financial Services.
Little wonder that despite the strong recovery seen in IIP numbers many experts remain cautious about upgrading earnings’ estimates. Analysts expect the Sensex earnings to range Rs 880-885 for 2009-10, which is about two per cent higher compared to 2008-09 earnings. In this light and considering the hovering concerns, the Sensex is currently trading at a slightly expensive valuation of 17.5 times its estimated 2009-10 earnings. “On an absolute basis, markets are currently expensive and we might see some more correction in the due course. Lot of people are talking about recovery especially post strong IIP numbers, but considering the current scenario there are equal chances that nothing gets materialise,” says Satish Ramanathan, head-equities, Sundaram BNP Paribas Asset Management.
Swine flu: an emerging risk
The impact of swine flu is also cited as an emerging concern and thus, market valuations look expensive. “How it will impact the market we cannot really quantify, but surely, if enough measures are not taken to contain the epidemic and assume what will happen if the people do not go to offices, we might have some impact on the markets as well. This will be in addition to the growing worries over drought in the country,” says Parmar. Experts feel that the impact of swine flu is likely to be more on sectors like IT services, hotels, tourism, entertainment and retailing.
The road ahead
Despite positive events like the signs of recovery in industrial production and corporate earnings, expect the monsoon and swine flu concerns to persist for some time. This is also a reason that the markets might remain range bound. “Although markets have recovered in the last few trading sessions, the concerns remain thus, I would advise investors to enter at lower levels,” says Deven Choksey, managing director, K R Choksey Shares & Securities.
“The best strategy in my opinion is to adopt a bottom-up approach. We should count on economy growing at 5-6 per cent and base your portfolio model accordingly. As far as global scenario is concerned, I clearly think that the worst in terms of the depression fear is behind us,” says Damani.
In the context of the emerging scenario, analysts believe sectors like FMCG, cement, auto and fertiliser may feel the heat in the medium-term due to the weak monsoons. On the other hand, domestic themes like healthcare, power utilities, infrastructure, capital goods and telecom may go relatively unscathed. Likewise, themes like IT and metals may also find favour, if the global economic growth improves further. Lastly, analysts recommend being selective with focus on larger and fundamental strong companies, which could weather any potential storms in the making.
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