Current market trends and how to navigate the next 12 months

Jan – June, 2008 correction phase was real value time and patient investors would have seen light at the end of the tunnel. OIL - OIL - OIL was the only refrain and admittedly it was scary to see oil scaling heights never thought possible earlier. Volumes dipped in the first half of the year and that gives me huge confidence of a better market ahead as infrastructure and reforms seems to be the only way forward. As said last time, range bound markets between 14500 - 18000 are a certainty.

There is now only way for the market (only for an investor) UP. Corrections would still be seen for the entire year due to various factors both fundamental and technical. Technically, the Sensex seems poised for a breakout to a higher level of 19500 – 20500 (restated due to lower growth projection for the year). Corrections would continue to be of the order of even 700-1000 at a time but probably the worst is over and 13000 would be the short term bottom and 15200 may hold out as the intermediate bottom. 2008 is most certainly a midcap/Consumer goods/Infrastructure year including Power, Pharma & Media.

As explained in my comment in March, 2008 new trends are emerging. The next resistance point is 18200 for the next transition movement upwards by December, 2008 to our recommended levels of 19000+ (restated due to lower growth, pressure on margins). Corporate earnings would be impacted slightly due to inflation and political insecurity affecting reforms agenda. They would probably remain stronger in the medium term, though in the short term there could be some minor earnings disappointments. Rupee target is still kept at 37, though it may touch 43.50. Indian reformers have to reform more to sustain the GDP growth.

The Fibonacci equation still shows a huge figure of 30000+ in 4-5 years time.

Indians will have to reevaluate the P/E range to a higher range of between 18-30 in the next 3 years.
Present P/E of 13+ FYQ309 and may be 11 FYQ410 is fairly cheap. In my personal opinion, this market is fairly valued and after a certain volatile phase (read as fear), there would be an upswing and again a downswing probably in January, 2009 (due to political factors) for a brief period. Power, FMCG, Infrastructure, Consumer Goods, Cement (only for long term), Pharma, Media, Biofuels and Auto are bullish in that order. One single piece of advice to our clients is to invest regularly when the whole world is afraid to invest and keep investing when the whole piece is being played out and wait for the re-pricing of corporate profits and its valuations.

Remember “Rome was not built in a day” so is wealth – it takes time

Markets have broken the level of 13000 and closed after a long time below 13000. Let us see if it remains below 13000 for 3 consecutive sessions. Then 13000 would be violated. Fundamentals are still fairly strong and a valuation gives me an EPS of the Sensex at 1060 giving an P/E of less than 11 times one year forward and about 13 times at present earnings. I thought that is pretty cheap and probably cheaper than fundamentals suggest (15000).

PEG (P/E Growth) of India remains the cheapest amongst the world markets including the emerging markets. That seems to me that the correction might be overdone

Investors must note that when markets (as given in my earlier mail) that when bull times were present the fundamentals were lower than the technicals and now when the bears are in control the fundamentals are higher than the technicals. This also means that timing the index is a futile exercise and has been proved to be failure world over. We are on record that once the markets recovers in 6 months we will see a level of 17000–17500 and then speculative / trading profit booking would bring the index back to 14000–15000 levels. Once this phase is completed the index is expected to scale its peaks once more & the whole game will be played all over again.

As a point of view we enclose the table prepared by Reliance Mutual Fund which goes to show the fundamentals are at variance with the technicals.

[Source: RMF Estimates, JP Morgan, Bloomberg]

Indian Markets last year were the darling and the best performing market and this year in 8 months have emerged as the worst performing market. I believe therefore the disconnect between Fundamentals and Technicals are very glaring and common sense tells me to be cautious but invest in drips and drabs (SIP) to ensure that average cost of acquisition lowers in the year. My target for next 12 months still remains at 20000+ and 3 years target is still 25000+. That still means 100% growth in 3 years. NOT BAD considering today’s environment.

Update on Glenmark Pharma

Glenmark Pharmaceuticals’ experimental molecule, GRC 10693, for the treatment of neuropathic pain, osteoarthritis and other inflammatory pain is entering Phase I clinical trials. The company has filed for the Phase I approval with the European regulatory authorities and expects to complete Phase I for GRC 10693 and enter Phase II before the end of FY 09. This is the company’s fifth molecule in clinical trials and is potentially a first in class molecule. The company is likely to be an early launcher in this class of compounds and is aiming to launch this drug by FY 11. The estimated size of the market for neuropathic pain is about US $ 5 bn with over 40 m patients worldwide, while the osteoarthritis estimated market size is about US $ 4 bn with 20 m patients. The molecule has successfully completed the battery of pre-clinical studies and has demonstrated favourable results.