beyondbrics

For those of a nervous disposition, India’s markets look peculiarly dicey just now. From another angle, especially compared to the tumult across the Arabian Sea, the country resembles a bulwark of stability. Investors seem unsure whether to laugh or cry.

The past seven days have seen significant swings in sentiment. As turmoil in Libya sent oil prices surging last week, Mumbai’s benchmark Sensex index incurred its steepest one-day fall in 16 months. Then this Tuesday, as investors digested the previous day’s budget and its commitments to reducing the fiscal deficit, the Sensex recorded its biggest gains in a single session since May 2009.

“I still think that the market is looking for direction,” says Purvesh Shah, head of India capital markets at UBS.

The auguries are conflicting. India’s stubbornly high inflation was a worry even before oil prices raced higher, a particular concern for a country that meets at least 70 per cent of its energy needs with imports.

As Shah says:

India has a very high exposure to many commodities. Until such time as there’s certainty on that, people are still going to have worries about the Indian market.

For that reason, traders are acutely sensitive to news from the Middle East. The market’s swings between positive and negative territory on Thursday were driven in part by rumours of Muammer Gaddafi’s next moves. It closed almost flat.

Domestically, however, the picture is different. Noisy corruption scandals had unnerved some investors – including the foreigners who have withdrawn a net $2bn from equities so far this year.

But next to the chaos being reaped by the autocrats of the Arab world, a nation where such scandals make headline news in a tigerish press starts to look much more attractive.

At the same time, net inflows to Indian corporate debt from foreign investors this year have reached $2.16bn, eclipsing the losses in equities.

For all the confusion, the Sensex, down by nearly 10 per cent for the year at 18,489 points though it is, is still far closer to the highs above 20,000 points of the 2007-08 bull run and November’s ebullience than the doldrums of mid-2009, when it sank beneath 9,000 points.

In any case, as Dharmesh Mehta, managing director for institutional equities at Mumbai-based Enam Securities, notes, low trading volumes and illiquidity mean even moderate sales can generate exaggerated market movements.

Mehta says the overarching picture of India’s extraordinary growth is unaltered.

“It’s not a change of sentiment – it’s a valuation story,” he adds.

UBS’s Shah says Indian price to earnings multiples have declined from their recent peak of 17 times to 14 times, closer to the long-term average.

He concludes:

The valuations are at a level where they are looking sensible now.

Related reading:
‘India growth’: investors lose the faith, beyondbrics
India: Taming the animal spirits, beyondbrics
Indian equities – cause for concern?, beyondbrics