GDP - Slow but Steady!!!

While the GDP numbers will be analysed and looked in to by various people from various angles and for various purposes, as investors we are more interested in understanding the impact of these numbers on the investment climate and market sentiments.

I have tried to evaluate the numbers from this perspective and the following emerges:

1. The rise of the ‘vast’ agricultural sector is something to cheer about. This is proof enough for the Indian and foreign investors that the Indian economy will no doubt recover from the global recession much fast than other countries. The growth of the ‘core’ agricultural sector suggests that the rural economic activity and rural incomes are rising.

This should further accelerate the domestic demand, which had slowed down in the recent past. The ‘new’ government at the centre too has a long standing commitment to improve the agricultural sector and further boosting measures can be expected in the coming budget and also in economic policies of the government. We should not be surprised if the next boom in GDP growth is led by the agricultural sector.



2. The industrial sector has been reeling under pressure and has shown weak performance. However, with a rise in activity in other sectors like agriculture and construction, we are likely to see the revival of the industrial sector in the coming two quarters.

3. From the macro point of view, the yearly GDP growth rate of 6.7% is perhaps the MOST important figure for the investor! Just as we calculate valuation of a company based on its earning and its corresponding Price to earning (P/E) multiple; similarly the GDP growth rate is the figure important to compute the ‘Market’s P/E multiple’

As a thumb rule, stocks markets put a valuation of about two times the GDP as the fair value for the market. Anything beyond that may be termed as overvaluation.

There is a widely accepted consensus that the GDP rate for the current year 2009-10 will also be about 6.5%, given the state of the world economy. Moreover Indian markets are likely to attract a higher flow of FII money because of its relative attractiveness in terms of a steady economy. Thus we may put a ‘premium’ to this extra fund flow.

Instead of the usual two times GDP; we put a 2.5 times multiple to the GDP to arrive at the valuation of the market.

This gives us 6.5 X 2.50 = 16.25 as the P/E multiple for the market

Thus , the fair value of the Indian markets should be in the vicinity of 16 to 17 P/E multiple for its index stocks.

At the current Index level the following emerges



The above table suggests that at current Index levels, the market has already discounted more than 2.50 the expected GDP growth rate of 6.5%. Thus it may well be time for investors to become cautious and start booking profits in order to re-enter at lower index levels. Suggested entry level for the indices are Sensex 12000 (3500-3700 for Nifty)

Happy Profit booking!!!

CA Rajiv D Khatlawala
Head of Research & Training
JHAVERI Securities Ltd.
Baroda.