Has the market Peaked

Has this market peaked?
Sandeep Singh
Posted online: Monday , July 16, 2007 at 1513 IST
Updated: Wednesday, June 29, 2005 at 1257 hours IST -->

Share prices have travelled such a long way in such a short period of time that each time a new Rubicon is hit, speculation starts about the future. So, when the BSE Sensex ascended to 15,000 on July 6, discussion centred around one question: has the market peaked? Will it create a trough or will it continue its steady climb to another high?

Our guess is as good as yours. The market is tethered to the fine edge of valuations — at its Friday closing of 15,272, the Sensex was discounting its 2006-07 earnings a rich 22.1 times. It’s not undervalued to be labelled a ‘buy’. It’s not overvalued either to be dismissed as a ‘sell’. Given the frivolity of factors that hold sway over any market in the short term, there could be a turnabout or a continued march. But if you’re a long-term investor, as you should be, don’t worry about such trivialities. Learn your lessons from this market rise, and keep investing, for the India story is still alive.
Ups and downsThe first lesson is that you need to be discerning what you are buying, a point made by the details of the Sensex’s rise, as well as by what’s happened elsewhere.
The Sensex has travelled from 10,000 to 15,000 — a rise of 50 per cent — in just 17 months, but there’s great variance in the pace of rise down the ranks. Only 12 of the 30 Sensex stocks have grown faster. Not only have 12 grown slower, another six have fallen. The Sensex has been pulled by five stocks that have a combined weightage of 38.4 per cent in it: Reliance Industries (up 84 per cent), Bharti Airtel (81 per cent), L&T (73 per cent), Reliance Communications (60 per cent) and ICICI Bank (55 per cent).
Go deeper in the ranks, and the bullish undertone gets diluted further. All the five broader BSE indices have trailed the Sensex by 2-21 percentage points; six of the 11 sector indices have under-performed the market, with healthcare, auto and FMCG returning not even 10 per cent. As many as 73 of the 242 stocks, or 30 per cent, that make up the BSE Mid-cap index have lost ground during this 17-month period. The variance is even more in the BSE Small-cap index, where 204 of the 448 stocks, or 45.5 per cent, have given negative returns (See graphic: The small details ). Conclusion: this is no rally and the rise in prices is selective.
Be selectiveThat the market is discriminating in its approach is, in fact, a vote of confidence in it. It is some indicator that stocks are not merely riding a wave and that the market is linking rewards to performance. It is some indicator that companies that continue to perform and are not overvalued will continue to do well. Conversely, even if fundamentals or sentiment slip, the market might slip, but chances are, it won’t crumble.
The outlook in the short term is iffy and unpredictable. Says S.N. Lahiri, co-head of equities, DSP Merrill Lynch Fund Managers: "It will be difficult to sustain this momentum in the short term. It might enter a consolidation phase over the next year or so, before making another move." Adds Rajesh Jain, vice-president and head of research, SMC Global: "The market is definitely overstretched, which raises some concerns, as other markets are trading at cheaper valuations."
However, experts say that valuations should be seen in the context of earnings growth. Says Ajay Bagga, chief executive officer, Lotus India Mutual Fund: "Only China is growing faster than us, and it is trading at a PE of 35." The Q1 earnings season has got off to a tame start, with frontline companies like Bajaj Auto taking hits for various reasons. Says Lahiri: "There are concerns over the rise in input costs, wages, oil prices and interest rates, but still many companies are able to overcome these challenges."
However, as the movements of the past 17 months have shown, a positive outlook is not a license to buy anything and everything. Says Krishnamurthy Vijayan, chief executive officer, JPMorgan AMC: "Opportunities exist across market caps in specific sectors that are set to grow. Follow a bottom-up approach, and invest in companies that have good growth prospects and are trading at reasonable valuations."
The experts we spoke to didn’t want to disclose names of companies, but they did touch upon some of the promising sectors and stories. Says Vijayan: "We are overweight on sectors that capture infrastructure growth, especially power. Banking and upstream oil also look good." Adds Lahiri: "Companies in the infrastructure and consumption domain should do well." Jain, who sees the current market, as a "momentum play" recommends old economy sectors like capital goods.
Increasingly, investing cues will come from the Q1 results, which kicked off last week and will pick up momentum this week. In addition to the pressure of performing on a higher base, operational hurdles are also increasing, like managing the rupee for IT companies. Says Lahiri: "The rupee might keep appreciating for another two to three years, which will definitely pose a challenge to IT companies. Not only will they have to hedge smartly, they will also have to try and increase billing rates and cut costs." Among the investible set of 150-odd stocks, it’s the ability to manage such situations that will distinguish the leaders and the laggards.
‘Infrastructure looks good’S.N. LahiriCo-head of equities, DSP Merrill Lynch Fund ManagersOn what lies ahead15,000 is not the end. Sustaining this momentum in the short term will be difficult, as companies are currently investing to scale up capacity. So, the market might consolidate in the next 12 months, before moving on.On threats and opportunitiesThere are concerns over the rise in input costs, wages, oil prices and interest rates, but still many companies are able to overcome these challenges. There are opportunities, especially in infrastructure and consumption, but you will have to pick well.On the outlook for IT companiesA growth in economy leads to a strengthening of its currency. The rupee might keep appreciating for another two to three years, which will definitely pose a challenge to IT companies. Not only will they have to hedge smartly, they will also have to try and increase billing rates and cut costs.On how to invest in the marketPeople entering the market should invest only in diversified equity funds, so that they are diversified across sectors. At the second level, they can invest in opportunity funds and, subsequently, theme funds and sector funds.
‘You need to shut out the noise’Krishnamurthy VijayanChief executive officer, JPMorgan AMCOn the outlook for the marketThere are still opportunities across market capitalisations in sectors primed for growth. Follow a bottom-up approach, and invest in companies that promise growth and are available at reasonable valuations.On how to investWe look to shut out the day-to-day noise, and instead focus on the long-term prospects of the stocks we chose to invest in as well as those we chose not to invest in. Take this approach, and monitor both your positive and negative decisions.On where to investWe are overweight in sectors that capture infrastructure growth, especially power. I also see growth in banking and upstream oil. Select companies in these sectors have good prospects as investments. We are underweight on real estate, the prime reason being lack of transparency.