Outlook on the Sensex: Is it time to invest now?

Before I even begin, please let me clarify that Sensex is in no way related to Sex.  I also didn't misspell the word Zen Sex.  So for those who were expecting a sex article from this particular post, you are now free to move on.

Investing in Indian Stocks is not a popular choice by many, not even to the seasoned traders.  This may be due to the wild fluctuations of the index that can rarely be seen in other indices.

But like a hunky man walking down the street, India's stock market index has drawn my attention due to its valuation for some time now.  But I am also reluctant to invest in Sensex merely from instinct.  Like any disciplined investor, I want to do my due diligence.

Let's look at the historical Sensex from July 2009 to July 2012. and its corresponding PE ratio, PB values and Dividend Yield so we would know when is the right time to enter the index.  We do not want to invest in the index when it is overly optimistic and suffer a quick fall afterwards.  Investing in the market when the PE ratio is high increases the chances of low returns or negative returns.  From the table below, one can see that the PE ratio for the past 3 years has been in the range of 16 to 23, and it is currently at 17.   Just like the PE ratio, investing in the index when Price to Book ratio is high increases the chance of low returns.  PB ratio of above 4 should be avoided. As for Dividend yield, it is unusual to find a high dividend yield for index, unless the market is severely pessimistic about the market.  But normally, an acceptable dividend yield would be between 1.5 to 2.5%.  

Month	Open	High	Low	Close	Price/ Earnings	Price/ Bookvalue	Dividend Yield
Jul 09	14,506.43	15,732.81	13,219.99	15,670.31	19.10	3.53	1.32
Aug 09	15,694.78	16,002.46	14,684.45	15,666.64	20.08	3.73	1.24
Sep 09	15,691.27	17,142.52	15,356.72	17,126.84	21.20	3.95	1.17
Oct 09	17,186.20	17,493.17	15,805.20	15,896.28	21.66	4.06	1.14
Nov 09	15,838.63	17,290.48	15,330.56	16,926.22	21.23	3.99	1.15
Dec 09	16,947.46	17,530.94	16,577.78	17,464.81	21.82	4.10	1.12
Jan 10	17,473.45	17,790.33	15,982.08	16,357.96	21.99	4.11	1.10
Feb 10	16,339.32	16,669.25	15,651.99	16,429.55	19.97	3.65	1.18
Mar 10	16,438.45	17,793.01	16,438.45	17,527.77	21.05	3.85	1.12
Apr 10	17,555.04	18,047.86	17,276.80	17,558.71	21.28	3.88	1.10
May 10	17,536.86	17,536.86	15,960.15	16,944.63	19.96	3.56	1.15
Jun 10	16,942.82	17,919.62	16,318.39	17,700.90	20.57	3.34	1.18
Jul 10	17,679.34	18,237.56	17,395.58	17,868.29	21.20	3.40	1.17
Aug 10	17,911.31	18,475.27	17,819.99	17,971.12	21.61	3.45	1.15
Sep 10	18,027.12	20,267.98	18,027.12	20,069.12	22.99	3.66	1.09
Oct 10	20,094.10	20,854.55	19,768.96	20,032.34	23.89	3.82	1.04
Nov 10	20,272.49	21,108.64	18,954.82	19,521.25	23.03	3.71	1.06
Dec 10	19,529.99	20,552.03	19,074.57	20,509.09	22.93	3.73	1.05
Jan 11	20,621.61	20,664.80	18,038.48	18,327.76	22.00	3.62	1.08
Feb 11	18,425.18	18,690.97	17,295.62	17,823.40	19.67	3.40	1.16
Mar 11	17,982.28	19,575.16	17,792.17	19,445.22	20.04	3.46	1.13
Apr 11	19,463.11	19,811.14	18,976.19	19,135.96	21.05	3.65	1.07
May 11	19,224.05	19,253.87	17,786.13	18,503.28	19.59	3.45	1.14
Jun 11	18,527.12	18,873.39	17,314.38	18,845.87	19.37	3.55	1.16
Jul 11	18,974.96	19,131.70	18,131.86	18,197.20	19.60	3.44	1.4

Aug 11	18,352.23	18,440.07	15,765.53	16,676.75	18.36	3.34	1.51
Sep 11	16,963.67	17,211.80	15,801.01	16,453.76	18.35	3.36	1.52
Oct 11	16,255.97	17,908.13	15,745.43	17,705.01	18.20	3.36	1.52
Nov 11	17,540.55	17,702.26	15,478.69	16,123.46	17.61	3.34	1.53
Dec 11	16,555.93	17,003.71	15,135.86	15,454.92	16.92	3.22	1.58
Jan 12	15,534.67	17,258.97	15,358.02	17,193.55	17.09	3.30	1.56
Feb 12	17,179.64	18,523.78	17,061.55	17,752.68	18.32	3.55	1.44
Mar 12	17,714.62	18,040.69	16,920.61	17,404.20	17.85	3.46	1.47
Apr 12	17,429.96	17,664.10	17,010.16	17,318.81	17.63	3.32	1.65
May 12	17,370.93	17,432.33	15,809.71	16,218.53	16.49	3.01	1.80
Jun 12	16,217.48	17,448.48	15,748.98	17,429.98	16.37	3.09	1.76
Jul 12	17,438.68	17,562.89	17,351.50	17,538.67	17.05	3.23	1.69

Although the current P/E ratio , PB values and Dividend Yield of the Sensex seems to indicate that it is attractive to go in, India is facing a rough ride.   India's growth slowed to 5.3% in the first 3 months of 2012.  The budget deficit is  at 5.9%, way above the target 4.6% of GDP.  It seems the government is spending money on impoverished rural areas and financing the poor with their basic needs.  The problem is they raise the money by turning to foreign investors and stacking them with sky-rocket licensing fees and taxes.  Recently, they have legal battle with Vodafone because they want them to pay $3.6B in capital gains taxes stemming from their takeover of Hutchison Whampoa.  Vodafone cried foul.  Last I heard, the government is reconsidering this case.

And the more important issue is the GAAR ( General Anti Avoidance Rules) that has sent the foreign institutional investors running out of India.   Due to its impact to investors' sentiments, the government is deferring the implementation of GAAR.  Their very own Chamber of Commerce realizes the effect of GAAR to their economy and is requesting for the postponement of GAAR till 2015.  Although GAAR has been postponed,  India still needs to do a lot more to bring back the confidence of domestic and overseas equity investors to boost their economy. 

The government needs to find better ways to finance their pro-poor projects than merely breaking the backs of foreign investors by imposing high taxes and being creative about their tax schemes.  Gone are the days of having the mentality of "You need India, more than India needs you.".   On the bright side, the fact that the government is reconsidering the Vodafone case and their willingness to defer the GAAR are signs that the government is being flexible and this may be our window of opportunity to place our bets now, especially with a weakening rupee as an added bonus.