Sensex GDP growth --POSITIVE MOVE

Sensex PE multiple leads GDP growth

It has been a big indicator in the past of a turnaround in economic activity

Shishir Asthana / Mumbai Dec 01, 2012, 00:14 IST The market was expecting a poor GDP number for the September quarter, which was delivered by the government. In Q2, the economy grew at 5.3 per cent, a tad lower than the 5.4 per cent expected by economists. A sharp swing in mining and quarrying activity gave some respectability to the numbers. This sector had declined by 5.4 per cent in the September 2011 quarter, and as a result of this low base, the growth stood at 1.9 per cent last quarter. Manufacturing continued to remain depressed, posting a growth of 0.8 per cent as compared to 2.9 per cent a year ago. However, manufacturing did slightly better than the 0.2 per cent growth recorded in the June 2012 quarter.While the industry and the finance minister were disappointed when the Reserve Bank of India didn’t cut interest rates in October to boost growth, other data coming from the government suggests the central bank might not be in a hurry to do so. Department of Agriculture and Cooperation data reveals production of rice, coarse cereals, pulses and oilseeds are expected to decline by 6.5 per cent, 18.4 per cent, 14.5 per cent and 9.6 per cent, respectively. Thus, food inflation is likely to remain sticky, at least till the rabi season harvest at the end of FY13. For the first half, the GDP grew 5.4 per cent. RBI has revised this year’s GDP growth forecast to 5.8 per cent, suggesting the economy will need to grow at 6.2 per cent for the second half, which seems difficult. Thus, it is likely that RBI might reduce its GDP forecast further. However, the stock market did not share the gloom of GDP growth being near a decade low. Key indices are close to their two-year high levels and within 10 per cent of touching a new all-time high. While the markets appear to be running ahead of fundamentals, a comparison of GDP growth with the price to earnings (P/E) ratio of the BSE Sensex depicts a different picture. As the chart shows, markets are a lead indicator of the economy. In the past, GDP growth has shot up nearly a quarter after the market has risen. In the present scenario too, there is a small diversion between P/E and GDP, indicating the possibility of higher growth rate going forward. One data that points towards such a possibility is the positive growth in gross fixed capital formation which has increased by four per cent, indicating some revival in the asset creation. http://www.businessstandard.com/india/news/sensex-pe-multiple-leads-gdp-growth-/494190/