With the Chinese market down 9% yesterday, and the US markets experiencing the largest drop since 9/11, there’s little doubt in anyone’s mind as to what will happen in India. As I write this, I see that the Sensex is down 3.5% to 13,000. It doesn’t help that JP Morgan & Morgan Stanley have come out with bearish calls for India. They point out 5 myths that might mislead investors:
- India’s sectoral composition is skewed towards sectors that trade on a higher multiple (due to their non-cyclical nature).
- India’s high Return On Equity (ROE) justifies its premium valuations.
- Equities are attractive relative to bonds.
- Returns have only played catch-up with GDP growth.
- Indian equity valuations compare favourably with history.
The key question is whether we are seeing the trend in global markets making a 180-degree turn - most markets have been going up & up since the May/June 2006 correction. In India, we have seen weakness in the equity markets since last week, and now the rupee is starting to weaken as well. Even gold - the “safe haven” - dropped 4% yesterday, so investors must be getting worried.
This might be one of those times when cash is king - especially when Indian banks are offering attractive interest rates on FDs, amidst a liquidity crunch.