Bulls have tough times ahead

The bull market does not end till the last bear has given up hope of a reversal in trend—that’s an old saying among market players. Going purely by this contrarian indicator, bulls can sit pretty for the time being.

Though bruised from repeated defeats over the past many months, bears have not given up hope yet and are looking for a suitable opportunity to strike back.

But if one were to look at some key indicators at hand, bulls are not going to find it easy defending Point 15K, which they had captured on Friday.

Firstly, valuations. At a one-year forward price to earning ratio of roughly 20, Indian equities do not rank among the cheapest in the emerging markets universe.

The high P/E can be justified to the extent that India offers a wide array of sectors to choose from, a liquid market, an effective regulatory framework and good corporate governance. But the tribe of analysts voicing concern about the Indian market beginning to look overvalued is growing.

The high base effect appears to be catching up with India Inc. Brokerages expect the cumulative earnings of Sensex companies for the April-June quarter to grow around 19%, compared with the same period last year. This is well below the growth estimates being flashed a year or two ago. For next year, analysts have toned down growth projections further.

Look carefully through the pile of research reports churned out by broking firms daily. The number of earnings and rating downgrades—something very rare till a year ago—is on the rise.

Already, players are eyeing the Infosys Technologies guidance on Wednesday uneasily. Tech stocks have been going through a rough phase because of the rising rupee, and Infy’s guidance may hold the key to the short-term trend in the sector.

Loan growth—a key indicator of demand in the economy—is also showing signs of cooling off, thanks to RBI’s efforts to rein in inflation by hiking interest rates. Loans to corporates and individuals dipped by Rs 30,532 crore between April and June 22. Even discounting the fact that corporates may be borrowing from sources other than banks, there is no denying that the average consumer is feeling the heat of rising rates.

So what is the saving grace for the market? Inflation is under control and this has raised hopes that banks may not hike interest rates anytime soon. Most players feel that a correction, if at all it comes, will be sparked by global factors rather than domestic ones. So what is the best strategy under these conditions? Majority of brokerages are advising their clients to follow a stock-specific approach.