... Profits Weak

For the stockmarkets, the problem is compounded by the lack of liquidity. The liquidity crisis has led to the domination of the country's bourses by foreign investors, and movements in the markets are dominated by foreign money, on the one hand, and unbridled speculation on the other. The genuine domestic investor is notable by his complete absence. This dependence on foreign investors has its own problems, the chief one being that local markets have become part of a global market. With Asia fast losing its status as the preferred destination for foreign funds, the flow of funds to the Indian markets too has been affected. East European stocks, for example, have higher growth-earnings multiple than Indian stocks, and a lot of money is now flowing there. FIIs have realised that while GDP growth rates may be high for Asia, a large part of that growth is accounted for by small and medium companies which are not listed on the market, and hence the GDP growth is not captured by the markets. The export boom led by small firms, for instance, does not find reflection in the market.

 

Stock markets operate on expectations, and with earnings forecasts being pared, stocks lose their attraction, resulting in lower price-earnings multiples. Valuations may now be very cheap, but the growth-earnings multiple is getting worse for India.