December 2010: Valuations are not yet compelling

Equity markets in India rebounded from the weakness witnessed in November, finishing the month up 4.6%, partly supported by a rebound in International markets. The rise in the markets was despite a net selling by FIIs – FII flow having turned negative after several months – and the continuing concerns over the telecom scam. With the US markets starting to respond to the large stimulus programs, there has been some strength in global markets over the past few weeks. One also needs to be note that December is typically a thinly traded month due to the holiday season globally and therefore may not be a true representation of a trend.

The effects of the various scams on equity markets, which led to a certain amount of weakness over the past couple of months, has weaned off a bit. On the other hand, there is definitely an increasing frequency of such negative news being unraveled. Scams are an indication of an inefficient and unsustainable growth, and investor confidence in such a situation normally gets diminished. The government needs to start taking decisive steps to address some of these issues, in order to ensure investor confidence is maintained.

The year 2010 was the strongest years for foreign capital inflows into India, at almost $ 30 billion. As a result of the strong FII flows, despite the domestic Mutual Fund industry being a net seller, Indian markets finished on a positive note. FIIs account for more than 15% of Indian markets and therefore have a significant influence on markets. Partly driven by strong FII flows, equity markets in India are a bit stretched and much is dependent on fresh allocations in 2011. FII flows over the next couple of months would set the tone for Indian markets in the coming months, and already there is some concern over valuations of emerging markets compared with some of the developed markets like USA. The next couple of months should give a reasonable flavor on FII flows in the coming months.

Earnings growth for some of the companies of interest for us have been fairly good and with the year coming to an end, some of the companies are starting to seem reasonable from next year’s earnings perspective. Their stock prices and valuations are not yet compelling, but these stocks are within a reasonable distance from starting to look attractive. We are keen to start buying into these companies, as and when prices become juicy.