India's Selloff: How Bad Can It Get?

While not too many brokers are saying it yet, there is a good chance that a bear market even in Indian equities is well and truly on. One might say that after almost a 5000 point, or around 25% correction, it already to late to say it.

 But Sensex is at a shade under 16000 levels at the moment. And there is a good chance that it may rarely cross 16K levels in 2008.

 This would happen if the P/E FIIs are willing to give the Indian market get revised downward. One reason the market rose 7x between 2003 and 2007, is that one year forward earnings multiple went from around 10-11x in 2003, to over 20x. At this point, Sensex's FY09 P/E is around 16x. This is median range, neither optimistic nor pessimistic.

 If the US economy goes into a recession, which it perhaps already has, then forward multiples will correct globally. So it is hard to see FY09 multiple for Indian markets expanding in the near term. So that leaves only one mode for market to be driven forward - strong earnings momentum. Earnings growth has shown signs of slow down in FY08. While brokers are still maintaining around 20%, expect some downward revisions.

 So at this point, expect the Sensex to trade say between 14K-16K range, with a greater chance to head lower rather. Imagine the scenario --

- Further sharp writedowns for 1-2 months amongst global banks
- 1/2 mid size but significant global banking names go under (merge to survive)
- US economy officially in recession

If the above happens, expect Indian earnings momemtum to deflate, and market could well head to 12K range. Dont think it can head any lower

Comments

[Deepak Shenoy:]

I'd written about this at:

blog.investraction.com...

As of Feb 7, the Nifty EPS grew only 13%. Dividend yield in India has always been of the order of 2% or so so let's leave that out. The P/E then was 22 trailing.

The Nifty was at 5133 at the time, down a staggering 1000 points from the Jan highs.

As of today we're at 4600 on the Nifty, a further 500 point drop from when I wrote the article - another 10%. Though to be honest this 10% has happened in the last one week.

I'm still confident we'll recover after a few years, but bottom fishing should happen at the 3500 levels on the Nifty (corresponds to 12000 on the Sensex). My first buy point is 4000 (14,000 Sensex).

Disclosure: Short the index. (Was not short when I wrote the article)

2008 Mar 10 02:49 AM