Have the Indian stock markets bottomed out? By I.P.Singh

A million dollar question! Isn’t it? Well, if analytical reasoning and the facts available with history are anything to go by, it seems that they already have. Prices in the stock market are determined by discounting future dividends by an appropriate discount rate, which in turn is depends upon the risk inherent in the company. Dividends taken into account for this purpose depend upon a company’s past performance (earnings growth, dividends payout ratio etc.), guidance given out by the company’s management, current and expected future economic scenario and analysts’ expectations about the company’s future performance amongst others. On the other hand the discount factor is determined by risk inherent in the company’s business along with the variability of company’s stock as compared to the broader stock index.

As some of the largest economies of the world such as U.S.A, U.K., Germany head towards a recession, it has become clear and is agreed upon that India too won’t escape a slow down. Indian GDP growth rate for the current financial year has already been revised downwards to 6.5 ~ 7% from the 8.5 ` 9% expected earlier and corporate earnings downgrades have also started happening. Likewise, EPS estimate of the 30 share Sensex has been downgraded to 933 from 972 expected earlier. It’s a well known actuality that when 10 analysts would show thumbs down to earnings, 11th one just follows. By all this, I mean to say that it is happening simultaneously. All the bad news that is going to surprise the common man in the coming quarters has already been discounted into the current stock prices. Now, until and unless markets encounter shocking news expected by nobody (such as India’s second largest bank going belly up), it seems that 2250 on Nifty should be the bottom for this bear market.

Now, let’s have a look down the memory lane. History testifies that Indian stock markets tend to bottom out at 9 to 10 times forward earnings. If we go by the current expected EPS estimate of 933, a multiple of 9 would take us to approx. 8300 on Sensex. We have already kissed 7697 in the month of October and have legroom for another 8% fall in Sensex EPS estimate. One of the major reasons behind the drastic fall in Indian markets has been FII outflows. We have already witnessed USD 12 billion waving goodbye to Indian markets. As per the figures releases by SEBI, net position held by FIIs is another USD 1 billion. Even if they cut down their position to zero, we may not see the levels seen in October 2008 once again. Another macroeconomic factor that is worth discussing is the interest rate. With inflation coming in at 8.98% as against 10.24% expected for the week ended Nov 1, 2008, RBI would find it quite easy to go ahead with its plans of easing the liquidity in the system and making cheaper credit available. Where are the markets headed in the next in 8 to 10 months is anybody’s guess, but the facts and figures suggest that the long consolidation phase before the next bull run has already started.

Written By Inder Preet Singh
I am BE (Comp Science) followed by MBA.

Article Source: http://www.saching.com

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