A nervous market

The below-normal PE ratios reflect the broader business sentiment

The retail investor may have been wise when he moved away from the stock market over the past several months, seeking security in debt instruments, gold and even real estate. Given the increased volatility and the lack of any general direction, the market has been a risky place. The experts seem confused too; some predict confidently that the Sensex will climb from the region of 16,500 today to 22,000 by December; others talk of the index falling a good way from the present level, though not to the 2009 low point of about 8,000. There is such a wide range of possibilities in between these scenarios that any forecast can be considered plausible or implausible.

On balance, analysts seem to veer to the view that this is now a bear market. Yet, it is also true that the index multiples are now at about 15 times historical earnings. This is certainly below the Indian stock market’s medium-term average, and in the normal course would encourage punters to start buying. However, corporate earnings have been not been as good as in the past, and there is a clear squeeze on margins. If earnings fall, then at the same index multiple prices must fall too. This view is supported by the growing evidence of a domestic slowdown, combined with fears that the Reserve Bank of India might raise its policy rates further. While these have had a dampening effect on market sentiment, the even more important reason why the market remains so twitchy is the global economic situation, and the growing uncertainty about Europe managing its sovereign debt crises.

The market reflects the generally downbeat business sentiment that prevails. There are those who argue that the real situation with regard to sales and profits is better than the current mood might suggest; to those who look for positive signals, the fact that truck sales have held up even as car sales have fallen suggests that out there in the market things are still ticking over. But both investing and borrowing are based on confidence with regard to the future, and there is no denying that this has taken a knock in the last several months. Some of this flows from the picture of a floundering government that blunders its way from one crisis to the next. In fact, this is the one variable that is within the control of the authorities. If they were to demonstrate action on the reform front, and be seen to be on top of the inflation problem, investor sentiment could improve very quickly.