Vasudeo Joshi of Man Financial says that India is still 10 per cent away from its bottom, but it can fall further.
Excerpts from CNBC-TV18's exclusive interview with Vasudeo Joshi:
Take us through the parameters of your report and where do you expect this market to bottom out?
What we have done is, we have taken a look at the complete market history of the last 15 years for nine emerging markets including India. These are all Asia-Pacific ex-Japan markets. The main factors to take into account are the business cycles and economic cycles, the maximum falls that can happen in those markets and what are the valuations at those trough and peak levels.
As one can see when this rally started on April 30, 2003, India was one of the cheapest financial markets in the Asia-Pacific ex-Japan emerging pack. As the rally ended on May 10, 2006, India had become the most expensive market with respect to the other Asia-Pacific markets, ex-Japan.
After that the correction has taken place, this premium or discount in India with respect to the other Asian emerging markets, with respect to performance, returns and valuations have got corrected significantly.
As a result of which, India more or less trades in sync with the prospective valuations of most of these markets.
If one looks at India only, the maximum fall has been about 44 per cent during the Harshad Mehta times, compare that with the fall in Malaysia, which is 65 per cent, or Thailand, which is about 60 per cent or so. Those were times of the Asian crisis. If one takes the median fall of India, it is about 33 per cent from the peak. So withstanding the fact that what happens with respect to rest of the economic indicators, it seems that the median fall for India is about 33 per cent from the peak which we get at a level of 8500 or so.
Is it very intelligent analysis to go by how much markets have fallen historically to predict where the markets would be in the future. Does that stand up very well with the fundamental analysis that you do?
There are two ways to look at it. One is, if one does the business cycle analysis one looks at how the markets have performed in various business cycles, economic cycles and the various crisis periods. I think in the last 15 years or so in the Asian emerging markets, one has seen most of these things. One has seen scams in India, Asian emerging market crisis and Latin American crisis also.
One basically looks at the market historically for a long period of time and sees to what levels they can go. That does not mean that it is a sacrosanct figure but then one has to look at the valuations of a particular market with respect to the other markets at trough points. If one looks at a trough point valuation of India, the cheapest India traded any trough level in the past is about 9.3-9.5 times.
FY07, when the Index was 9200 it was quoting at 13.2 times FY07 EPS, which is an EPS of Rs 703 for the total BSE 30 inclusive of oil sector, financials, not calculated on the basis of free float. Taking the entire market cap to total profit, one will have India at Rs 703 EPS quoting 13.2 times.
It is a median valuation at the trough of India; any time in history is about 12 times or so. So one is still 10 per cent away from that. At the same time, it does not mean that one cannot have deeper corrections than that, because today what matters is that as the world is moving away from low interest rates, low inflation, extremely accommodative monetary policies and high growth to an area where one has high inflation worry and one has seen twice after the Asian emerging market crisis. There has been to a certain extent, if it is a stronger term to use, a contagion which has spread across all asset classes and all markets.
After 1996, for the first time, one saw recently in May all the asset classes, currencies, bonds, equities, gold reacting significantly across the markets. Two-three days back, one again saw six-seven central banks again reacting concomitantly to increase the interest rates.
That means we are looking at global actions now happening and the world is moving towards another area of higher inflation concerns, higher interest rates and to a certain extent looking at what the oil prices will do, the last thing on the growth has not yet been said.
So from that perspective we are not changing the earning zone of India this point of time but at the same time one cannot deny the fact that at the current level of current account deficit. India has the highest current account deficit except Indonesia in the entire Asia Pacific emerging markets and one of the highest fiscal deficit in all the emerging markets. We have to worry if there is further outflow of liquidity from the markets.Sensex Rise and Fall: Complete Coverage
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