Mumbai was one of last year’s high flyers but now that the BSE is down 6.4% year to date, we spent this week’s Trading the Globe figuring out what happened.
Two things immediately come to mind.
One: Mumbai was looking overvalued and still does. The BSE ran up 20% last year between January and its 21,000-point peak in November. Now it is down 8% from its high, but there is still room for these stocks to correct before new money can find a decent entry point.
Two: Inflation. Food prices have soared 18% in India and have led to outright riots in other parts of the world. This is a political hot button that may drive Delhi to adopt non-market-friendly policies as it tries to fight the trend.
Remember, this is a country where onion prices helped push out a state government in 1980. Food is not just a huge component in overall wholesale inflation of 8.4% — which would ordinarily be alarming in itself — but the key to the entire political set-up.
Throw in rising oil prices, and Delhi will almost certainly raise interest rates fairly aggressively, which will in turn put a wet blanket on corporate earnings and depress forward valuations.
When playing this market, you have got to be selective. Right now, we are bearish on INFY, SLT and RDY — more losses are in store for these companies, which are still fairly richly valued.
On the up side, we are bullish on TTM and WIT. Going against the herd, we also like HDB and IBN — we think the interest rate hike will help the banks.