Where is the pulp?

"Where's the pulp? Where's the pulp?" goes the tag line of a fruit drink being popularised, of late. Replace "pulp" with money or even 'reason' and you will know why markets should not rise in the near to medium term. By this, I mean that Sensex will probably not see sustained 17000 to 20000 levels in the next 8-12 months. As of last trading day, the Sensex closed a couple of hundred points below 16000.

Here's why:

1. Technically, at 16000, Sensex has a P/E of about 20, down from 28 at the start of year when record 21000 was breached. Analysts point out that P/E of 15-16 too is justifiable. This means that there is room for bottoming down. This is supported by the fact that 60% of the scrips constituting the Sensex are still trading at a P/E higher than their average 4-year P/E. It may mean they have room for rationalisation.

2. The FM has revised down the projected GDP growth for FY'09 from 'above 9%' to 'above 8%'. Analysts only expect 'more than 7%'.

3. Manufacturing sector has shown negative growth. Down to 5.3% this year, the growth the government says will be close to 11% next year. But there is a big slowdown cloud hanging over that. Given rising cost of imports, at a micro level, profitability will no doubt be impacted.

4. Agricultural output has not stirred any positive emotions while no new provision has been made for prodding agricultural growth. The 60K Cr waiver is not favourable to many or all, but that's another story by itself and it will not put an end to farmer suicides. For FY'08, a recent report forecasted a mere 0.9% growth in food grain output, down from 4.2% last year.

5. The Indian banking sector has only started to publicize its exposure to sub-prime funds.

6. IT sector is still trying to figure out what to make of the recession. But see no upward revision of guidance this year. The Rising Rupee, increase in direct costs and forecasted shortage of talent have already knocked off close to 30% in blue chip stocks. The end of tax holiday in the near future will only squeeze profitability. The flag bearer of 9% growth, services, will be marching only slower.

7. Inflation is rising higher. Already at a 9 month high of 5.11%, this time driven by rising costs (imports), it will be increasingly difficult to sustain operational margins.

8. Rising oil prices will continue to put pressure for an upward revision of petrol and diesel prices in India. But following the recent populist budget, the upward revision would not come by easily. Simply put, it would be an aberration to populist tendencies in preparation for the General Elections. So, oil companies will continue to show deep reds in their books.

9. Infrastructure is not doing that great. Look at the "good for nothing as of now" two 'swank' airports with national records of longest and tallest etc records to their names. Big airports, one already inaugurated, with no way to get to them.Their official launch has been postponed now. Each is an example of priorities that our 'leaders' have. Call the cause technical or political, the impact is economical.

10. Impending general elections may mean no path breaking reforms to bootstrap the above will be taken up now.

In the light of all these, FIIs, especially, hit hard on earnings in the sub-prime era may show faltering confidence, overall, in the current domestic economic scene. The sheen of India Shining episode is getting dulled down by lackluster or almost stalled reforms process.
What about Retail investors? Well, that category of traders or investors has not been driving the index. The recent IPOs have not done well and the market has all but tanked out and is bobbing up and down on a weekly basis. This gives no confidence to a retail investor. They will at best be cautious in putting their money in direct equity.

So, w.h.e.r.e. i.s. t.h.e. p.u.l.p?