Beyond the market's peak

India’s GDP in nominal terms has expanded by 113% over the past six years and earnings of 30 major listed companies have risen 168% during the same period.

Print Edition: Nov 29, 2007

How well have you been navigating the stock markets? Brilliantly? Hopelessly? Whatever your answer, one thing is certain — you are unsure about the future. One moment you hear that anything this good (Sensex earnings have risen about 200% since year 2000) is unreal and a correction is imminent.

Then you hear people promising that things will only get better. The hard reality is that you have a stake in the future of stock prices and you need an intelligent view on it. That's just what we found in Lehman Brother's recent report "India: Everything to Play For". Here are some excerpts:


Numbers speak louder than words. MONEY TODAY highlights some figures that have immediate or long-term personal finance implications.
  • 3% of Indian population invests in mutual funds, compared to 33% in the US. But the figure is steadily increasing. In the past one year, the industrywide total assets under management (AUM) has increased by about 45%, up from Rs 3,07,376 crore at the end of October 2006
  • 12% of banking deposits is what total mutual funds investments add up to.According to the mid-term credit policy review presented in October 2007, total bank deposits grew by 25%, higher than the growth rate of 20.4% a year ago
  • 4.9% of the household sector financial savings is invested in equity and equity-related assets—significantly higher than the figure in the recent past, but lower than the proportion of equity investments in the early 1990s

Corporate profits, the key drivers of stock prices, are driven by economic growth. India’s GDP in nominal terms has expanded by 113% over the past six years and earnings of 30 major listed companies have risen 168% during the same period. On the face of it, strong economic growth has been reflected in a very high growth rate for corporate profits.

Is this spectacular growth sustainable? That depends on, among other things, how efficiently companies use their resources to make profits. As illustrated, though the returns fell slightly in the past year, they remain well above the level achieved five years ago and also above the returns elsewhere in emerging markets.

Profits are being used to invest in the future. Investment spending of most Indian firms is on a spike. A majority of this spending is funded by retained profits than debt, indicating that corporate India’s balance sheet is healthy. Indian nonfinancial companies have a net debt-to-equity ratio of 28% compared with emerging markets as a whole at 38%.

Stock value (price to earning or PE ratio) matters more than the stock price. When this report was finalised (early October) the market was trading at 18.7 times the 12-month forward consensus earnings. This multiple is higher compared to India’s historical performance and relative to global markets. Emerging markets that are at higher multiples are Argentina (30.3 times), China (24.9 times) and Chile (18.8 times).

The final takeaway: The report expects returns on investments in Indian stocks to be between 12% and 20% over the next five years.


For the first time in 27 years, gold surpassed the psychological mark of $800 an oz (Rs 1,109 a gram). The last time gold reached its peak of $850 was in 1980, and globally there is a strong sense of gold reaching $900 in the near future.

The key factors that are driving the price of gold are the depreciating dollar, surging price of crude and a strong demand. “Gold has always acted as a safe haven and as a hedge against inflation.

Soaring crude prices leading to inflationary concerns and weakening dollar have driven the price of gold closer to its peak,” says Ramaswamy Iyer, CEO, Brics Commodities. Since January this year, the price of gold has risen by 22%. But Indians haven’t felt the pinch as hard as the West thanks to the stronger rupee.

The appreciation in gold prices has been only 10% in rupee terms. If you missed buying gold three months ago when it was low, wait for the festival season to end; prices are likely to correct.

- Tanvi Varma

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