Why some equity experts sound like the pied piper of Hamelin?

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 Why equity experts sound like the pied piper of Hamelin?
The Pied Piper of Hamelin played such wonderful music to get rid of the rats in the town of Hamelin, that he could finally lead the rats to drown into the sea.

A few equity analysts too are sounding sweet with ridiculous prediction of indices levels for the next few months. Some suggest 23,000 points in the next one year for the Sensex, while others suggest 25,000 points. Investors, however, should not bite the bait as the reality is that things are far worse than they seem domestically and globally.

S&P once again re-iterated its threat of a sovereign rating downgrade late last week. Should that happen, there's no telling where the markets could be headed.

Look at some of the data that has emanated in the last one week itself. Exports dropped for the fifth straight month in September as global demand stayed weak. What is unfortunate, however, is that trade deficit swelled to $18.1 billion from $15.7 billion in August, as imports did not keep pace with falling exports.

India just cannot afford the trade deficit continuing to swell in the medium term, as this could eventually put pressure on the currency.

The Consumer Price Inflation data, one of the important data points for the Reserve Bank of India to consider in its October 30, Monetary Policy Review has come in at 9.73% for September 2012.

The figure which was below 10.03 % reported for the previous month of August 2012, still remains high to give the RBI any room to cut rates. The WPI too is expected to remain elevated, giving the RBI very little headroom to cut rates in the medium term, with the recent increase in diesel prices compounding the problems. If interest rates do not go down, it could clearly hamper investments and hence growth.

Other economic indicators like current account deficit and the fiscal deficit are unlikely to show dramatic improvement, with the latter slated to be way beyond the budgeted levels.

The price to earnings multiple for Sensex companies for one year forward earnings is at 14 times, which is not cheap and is at historical averages. Unless, there is a major earnings uptick, analysts cannot justify their predictions of 23,000 Sensex levels.

Another big problem for India is the fragile political situation. What if the government collapses and the next election sees anti reform parties send a significant number of members to parliament.

Globally, things are bad with Greece on the brink of a euro exit; Spain seeking bailout; US headed for a fiscal cliff and Italy going the Spain way.

So, the philosophy while investing should remain, "look before you leap".


Read more about: sensex, nifty
Story first published: Monday, October 15, 2012, 8:37 [IST]
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