Half the year of 2007 has past, and the market hasn’t moved much in the last six months. The story of Sensex, India’s benchmark index consisting of top 30 companies listed on the Bombay Stock Exchange, is still oscillating around the 14,000-mark. Sensex has tested the high points in the range of 14,326 to 14,724 in each of the months of January, February, April, May and June this year, but couldn’t move up beyond. For the last two months, it has found itself stuck in the range of 13,500 to 14,700. The month of June has been no different, during which the Sensex moved in a narrow range of about 750 points to oscillate between 13,947 and 14,683.

When the year 2007 began, every stock analyst had predicted that the New Year won’t bring the kind of growth Indian market had registered in 2006. Sensex had surged 46.7% in 2006 to 13,787 from 9,398 at the end of year 2005. The Sensex had made the upward move for the fifth year in a row with compound annual growth rate (CAGR) of 33.5%. In fact, the CAGR for the last four years was even higher at 42%.

The Sensex had moved up to the level of about 14,000 in 2006 from 3,246 at the end of year 2001. In the course of this journey, the Sensex started from the levels of despair and crises, moved to the point where market started valuing the fast-growing earnings of the companies, and then reached a stage where the Indian market was re-rated by the investors and even the future earnings were getting fully discounted in advance.

Since the market had run really fast in the consecutive years of 2005 and 2006 with 40%-plus rise in the Sensex, it required a breather for some time. At the same time, high inflation and the rising interest rates put a question mark on the growth of the Indian economy itself. All these factors coupled with global disturbances resulted in volatility in the Indian market, which took the Sensex to the level of 12,316 – the low of the year so far – on March 16, 2007.

The tide, however, turned again with the strong quarterly results in April and then encouraging industrial growth figures for March and April. Now, inflation has already been contained to almost one year low, the trend of rising interest rates has not adversely impacted the growth except for a couple of highly rate-sensitive industries such as Banking and Automobile, and the cycle of interest rate hikes now seem to have peaked out as indicated by the prominent bankers in the recent days. The sentiment of the market, which was pretty dampened in the middle of June due to anticipation of a severe correction, has again turned cautiously positive.

Coupled with the stagnation in the first half of 2007, these factors seem to have prepared the base for the next round of upward move. The price earning multiple of Sensex based on the trailing twelve months has already come down to 20.92 at the end of June 2007, from the level of 22.76 at the end of 2006. And now, the earning figures for the first quarter of 2007-08 will start pouring in from the second week of July. If the Sensex remains stagnant at the current levels or goes down for some reason, the higher earnings (as expected) of the first quarter will bring the PE multiple of Sensex down further, making it more attractive.