India Outlook: More Pain Ahead

IIP for the month of October 2008 was negative (.4%).   This is the first negative reading in fifteen years!  The lagged affect of high interest rates and tight monetary policy is showing up in official data.

“The situation is much graver than expected,” said Suresh Tendulkar, chairman of the Prime Minister’s Economic Advisory Council. Economists and analysts polled by ET ahead of the data had forecast industrial production growth in October to range between 2.3% and 3%.

Lagged affects work both ways...the effect of recent monetary easing and lower interest rates will take time to work their way through the system.  Unfortunately, recent monetary policy changes have been directed to manage the contagion from global events and ease the panic situation which existed in Indian money markets in October when call rates spiked to 21%.

There has been no action on the growth front...we are just waiting for the fall-out of global events...monetary policy is still too tight fighting an inflation which is faint even in the rear view mirror.  Fiscal stimulus has been an anemic .6% of GDP...and there are confusing signals from authorities about the way forward.

Analysts around the world continue to downgrade the growth projections for India...while the Government continues to forecast a 7%+ growth for this fiscal and the 2009-2010 fiscal...

Morgan Stanley :

cuts its forecast for 2009-2010 to 5.3%....its growth projection for second half of 2008-2009 is 6.2%.

“The bear market is likely to continue in 2009, the Sensex could move in a wide range in the coming 12 months, though our view is that the market is biased for flat-to-downside rather than upside. Our probability weighted Sensex outcome for December 2009 is 8,559,” said the Morgan Stanley research report.

I have been projecting Sensex 8500 and Nifty 2500 levels as fair value -Lee.

Credit Suisse’s Asia strategy report says the Indian economy would grow between 5 and 6 per cent and that corporate earnings growth would be negative in FY09, and flat in FY10.

I have been projecting -10% in FY09 and flat in 2010FY- Lee.

So what do I think about the Indian equity markets...well, they are saying that the tickets are going fast and you will miss the party..I will pass...My view is:

Thank you The Big Picture.

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2009 Outlook for Nifty/Sensex

India beat Australia by 320 runs in the second test...the outlook is for better in 2009.

Game 6 of World Chess championship Anand-Kramnik tonight; Anand is +2

On a more sombre note, current Sensex EPS is about Rs 825 per share and Rs 250 for Nifty. It would be hard to argue for growth beyond these figures given the amount of investment at the peak in Land, buildings and foreign acquisitions. Further, the middle class consumer in India will retrench somewhat given the hit to their mutual fund holdings and headlines about job losses.

My outlook for 2010 is a 10% reduction in EPS to about Rs 750 per share Sensex and Rs 225 per share Nifty.

The liquid market has transmitted a clear message to promoter groups to clean up the balance sheets and remove uncertainty. Sooner or later, the red ink will have to be reported. Unlike past episodes, foreign investors will take a long time to recover from their domestic disasters, and even longer to value new investments. The groups that leave uncertainty on their balance sheets will end up last in line in this 'new risk averse/aware world'.


At the projected EPS outlooks and a generous multiple of 11, we have the following:

Sensex: 8,250 Nifty: 2,475

www.partymarkets.com

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