Indian stocks have corrected for some time now. BSE Sensex has corrected from 16000 levels to 15000 levels. So is it the right time to buy stocks? Take a look at some of the facts before making a decision.
I was reading a news item published just today evening in all newspapers (It would be in tomorrow's print newspapers, I read it tonight on internet). It said "India sees drought threat in 161 districts and sowing of crops has gone down by over 20% ". This is a statement from our finance minister,Pranab Mukherjee, and so it is authentic and official one.
So how does falling monsoon, drafts and shrinking sowing of crops would affect stocks? Lesser sowing of crops would shrink the farming related incomes further. Expenditure on many retail FMCG items would come down. Demand for items ranging from soaps to tractors would be hit and so the related manufacturing companies and their stocks.
With 20% lesser sowing of crops, it is obvious that the production of pulses is going to shrink significantly and the available stocks of pulses would not be able to meet the demand in country. This would result in increased prices of food/pulses. Have you seen those rates of dal in markets touching Rs. 100 marks? This tadka to Indian common man's pockets could prove much spicier in coming days! ;)
So what does that mean for common man like you and me? Bigger portion of income to spend on buying food and lesser savings resulting in lesser buying of non life-necessary goods and consumer durables. Lesser spending on entertainment and sub-necessary goods like clothing etc. This chain could impact many companies and their earnings for next few quarters.
The rise in stock prices in past 6 months has been on account of good profit numbers that companies have reported in past 2 quarters compared to earlier quarters. But if one inspects closely, these profit numbers have come from cost cutting measures (firing people, reducing production and shutting plants) that businesses had taken up to beat recession towards the end of year 2008. There is decrease in actual sales turnover for most of the companies so no actual growth has happened in past few quarters.
The P/E Multiple ratio for BSE SENSEX is above 18 now which is significantly higher than "correct valuations" for Indian stock markets. Stock market seems to be overvalued. Indian stock markets (benchmark indices) have run up almost 60% from January 2009 without any actual significant growth.
I feel stronlgy that there is still lot of space for correction in stocks and that investors should be in wait and watch state for some time.
This is my personal opinion, you are free and are invited to express yourself.
