Equities: preparing for worse (Live mint.com 20th Feb 2008)Former US Federal Reserve chairman Alan Greenspan said recently that there’s a 50% chance the US economy will slip into a recession and the volatility in the equity markets worldwide reflects the high level of uncertainty among investors. The conservative attitude during such times is “to hope for the best, but prepare for the worst.”
So, how bad can it get for Indian markets? The last time the US had a mild recession was seven years back when the Sensex fell around 50% from its peak. UBS has now come out with a report titled “How would India fare in a global recession?” that explores the comparison with 2000-02 in detail.
The UBS note says that while there was a slowdown in the Indian economy during 2000-01, this was on account of a decline in agricultural production rather than because of the performance of sectors linked to the global economy. Moreover, investment demand was muted during the period and interest rates were much higher, which is why sectors such as autos and engineering languished. The note points out, “In 2000-2002, market’s earnings decline was caused by IT services, metals, petrochemicals, engineering, automobiles and telecommunications. These sectors contributed 44% to market’s earnings in early 2000.
Today, in contrast, risk to earnings appears significant only for IT, metals and petrochemicals—the export-oriented sectors and the global commodities. These sectors constitute 36% of market’s earnings today—implying that the risk to earnings is significantly lower today than in the past.” Moreover, sectors such as IT, autos and even metals are at lower price multiples today than they were in February 2000.
So what’s UBS’ worst-case scenario? The impact on commodity prices is likely to be less, simply because US demand as a proportion of global demand for commodities is lower now than in 2000. The firm’s estimate of worst case Sensex EPS (earnings per share) is Rs989 for FY09, compared with its current estimate of Rs1,027. What about P-E (price-earnings multiple) compression? That’s tough to estimate, but UBS believes the lowest point for the Sensex is at 16,500. To cut a long story short, the implication is that for the Indian markets, there’s no reason why things should get as bad as 2001. More
So, how bad can it get for Indian markets? The last time the US had a mild recession was seven years back when the Sensex fell around 50% from its peak. UBS has now come out with a report titled “How would India fare in a global recession?” that explores the comparison with 2000-02 in detail.
The UBS note says that while there was a slowdown in the Indian economy during 2000-01, this was on account of a decline in agricultural production rather than because of the performance of sectors linked to the global economy. Moreover, investment demand was muted during the period and interest rates were much higher, which is why sectors such as autos and engineering languished. The note points out, “In 2000-2002, market’s earnings decline was caused by IT services, metals, petrochemicals, engineering, automobiles and telecommunications. These sectors contributed 44% to market’s earnings in early 2000.
Today, in contrast, risk to earnings appears significant only for IT, metals and petrochemicals—the export-oriented sectors and the global commodities. These sectors constitute 36% of market’s earnings today—implying that the risk to earnings is significantly lower today than in the past.” Moreover, sectors such as IT, autos and even metals are at lower price multiples today than they were in February 2000.
So what’s UBS’ worst-case scenario? The impact on commodity prices is likely to be less, simply because US demand as a proportion of global demand for commodities is lower now than in 2000. The firm’s estimate of worst case Sensex EPS (earnings per share) is Rs989 for FY09, compared with its current estimate of Rs1,027. What about P-E (price-earnings multiple) compression? That’s tough to estimate, but UBS believes the lowest point for the Sensex is at 16,500. To cut a long story short, the implication is that for the Indian markets, there’s no reason why things should get as bad as 2001. More
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