Thursday, April 8, 2010

Stock valuations ‘stretched’: Taurus MF

Stock valuations exceed the outlook for earnings growth and investors should be “cautious” for the next three months, said Taurus Mutual Fund (MF).

Policymakers from Australia to China are withdrawing monetary stimulus to avert asset bubbles and curb inflation. Benchmark BSE Sensex is at a two-year high, extending an 81% rally in 2009 even after the Reserve Bank of India (RBI) unexpectedly raised borrowing costs on March 19, a month earlier than scheduled.

“Global risks like the euro zone issues, rising prices of crude oil and stimulus withdrawal across the world” will play on the minds of investors, Mohit Mirchandani, head of equity investment, Taurus MF, said.

The Bombay Stock Exchange (BSE) Sensex trades at 17.3 times estimated earnings from 12 times a year ago, data compiled by Bloomberg showed. That makes India the most expensive after China among the biggest developing nations including Brazil and Russia, also known as BRICs. India’s valuations are also the highest in Asia after China and Japan.

Mirchandani said he will remain “cautious” on Indian stocks over the next three months as “valuations are stretched.” He’s been buying shares in Bharti Airtel and Idea Cellular, as a “contrarian call” and to build a “defensive portfolio in the short term.”

Shares of telecom operators have returned less than the benchmark index in the past year as a price war has eroded profitability. Bharti has lost 3.1% in the period.

Mirchandani said he’s “bullish” on India’s stocks in the next 12 months, and predicts earnings growth of 25% in Sensex companies by the end of March.

Drugmakers and agricultural companies will lead gains in equities as they benefit from changing global demographics, Mirchandani predicted. He holds shares in Dr Reddy’s Laboratories and Lupin Laboratories as well as Rallis India and Jain Irrigation Systems.

It’s in the interest of governments “to lower their health-care costs because the bill is on them,” and that will benefit India’s generic drugmakers, Mirchandani said. “The food habits of Indians are changing and they are eating more nutritious food.”

India’s pace of economic growth is “impressive” and may accelerate to the fastest in three years this financial year, Finance Minister Pranab Mukherjee said on April 2. The economy may expand as much as 8.75 per cent in the 12 months through March, Mukherjee said in New Delhi on April 2, reiterating a February Finance Ministry forecast.

Still, the outlook for a proposed European Union rescue plan to help Greece reduce its budget deficit may deter investors from riskier assets, such as those in emerging markets, Mirchandani said.

The Sensex index has climbed 2.9 per cent this year, following its biggest rally in 18 years. The gauge’s 14-day relative strength index, measuring how rapidly prices rose or fell during the specified period, was above 70 for two days, a level some investors see as a signal to sell.


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