The markets across the world have slipped to new multi-year lows on account of the deepening economic recession globally. In the USA, the economic realities have overshadowed the short-lived euphoria that was created by the rhetoric of the Obama administration.
The Indian equity markets have also witnessed a sell-off in line with the meltdown in the global markets. Apart from the global concerns, there are India-specific issues that have spooked the markets. First, the higher than anticipated consolidated fiscal deficit of 11.4% for the current fiscal 2008-09 and its fall-out on the economy (eg a possible review of the country’s sovereign rating). Second, the outcome of the forthcoming general elections remains uncertain with the growing possibility of a coalition government heavily dependent on the regional and smaller parties. Third, the recent incidents in neighboring countries like Pakistan, Sri Lanka and Bangladesh have added a new dimension of regional instability as a potential risk for the foreign investors.
Given the growing concerns (global and domestic) and the absence of any positive triggers till the new government comes in place by June this year, the risk of a break-down from the trading range of the past four months has increased substantially. However, the silver lining is that such an eventuality could be a once in a lifetime opportunity for building a long-term portfolio. Moreover, the markets would continue to provide strong trading rallies despite the downward bias.
By the end of 2009, corporate performance should show a distinct improvement on the back of the lag effect of the central bank’s loose monetary policy, lower energy cost and favorable base effect. In terms of valuation, the Sensex is trading at around 10x FY2010 earnings considering a flattish growth in FY2009 and a marginal decline in its earnings in FY2010