Feb 22, 2005|
Markets: What's on the cards?
Markets have remained range bound over the last few weeks. If we look at the BSE-Sensex performance in the month of February to date, it has practically not moved either way (down 0.3%). There seems to be a sense of caution in the air. And this 'optimistic apprehensiveness' (if one may call it) over the last 3 weeks amongst investors that has kept the indices range bound, could be attributed to various factors.
The optimism could be on the back of positive announcements 'expected' from the budget and the prospects of the Indian economy going forward into the next 2-3 years, which has helped the indices from not witnessing any major correction. On the other hand, the apprehensiveness is seemingly on the back of the fact that there is a 'Left' to the right of the government (!), which could prevent any major reform measures from being announced in the budget and in this sense, the budget could be a non-event. Also, the fact that markets witnessed a sharp rally in the final week of January 2005, which saw them gain near 10% in mere 4 trading sessions, seems to have left the participants jittery. And at current valuations, they seem 'fairly' valued.
We say 'fairly' valued and not 'over' valued here because the Sensex is trading at about 14x FY06E earnings and this when compared to its historical valuations does not raise concerns. In fact, even when compared to its peers in other emerging markets like Hong Kong, Malaysia and Singapore, which are (as per reports) trading in the region of about 14x-15x their 1-year forward earnings, there is not much reason to worry even if the Budget turns out to be a non-event. Of course, positives from the Finance Minister would help the markets gain further ground.
As far as the budget throwing up any negative surprises is concerned, we believe that considering the current robustness of the economy across sectors, the confidence oozing amongst India Inc. leaders regarding their growth prospects over the next few years, strong Foreign Institutional Investors (FIIs) inflows, a strong forex reserves position and the spot of global attention that India is in currently, it seems rather unlikely that the government would take any irrational measure to cloud all this out in just a couple of hours (of the budget speech).
Now, let us consider for a moment that the government fails to meet market expectations and the budget actually turns out to be more of a non-event, then what? Where do the markets go then? Up or down?
Simply considering the key Sensex components (in terms of sectors) that form a major chunk, and their growth prospects over the next couple of years, the index valuations warrant adoption of a staggered investment approach. Apart from the fact that systematic investment planning has been a time-tested theory, it also gives the investor an option to increase exposure in fundamentally strong stocks by taking advantage of market irrationality. This could be in case investors turn panicky and decide to de-rate markets on the back of some negative news flows like a hugely unfavourable budget, or some adverse development on the political front, or any major global event that could affect equity valuations worldwide, etc. However, while the chances of any of these occurring being grim, as these cannot be predicted, it wouldn't be prudent to overlook the visible positives that adorn the India equity investment story. Some of these include:
A huge population base with a favourable demographic mix having the advantage of lower interest rates
Increased competitiveness of India Inc. that has helped withstand the onslaught by some of the biggest names in global corporate world
The intent (and some distinct measures) of the government over the last few years that hint at reforms
Heightened interest by FIIs who have invested close to US$ 17 bn in a little over a couple of years. Further, only 10% tax on short-term capital gains and NIL tax on long-term capital gains are added advantage for FII investments
Latent potential of the huge household savings finding their way to the Indian stockmarkets. It must be noted that only 2%-3% of Indian households favour equity investments.
Having considered all of the above, although the potential for growth in the long term is immense, at present, the valuations of many sectors/stocks seem to be fair. From here on, earnings growth will be the key driver for any further rise in stock prices and to that extent the emphasis on risks has to be higher than earnings prospects. Our long-term view is that there are companies in India with very good managements and robust business models. We also believe that over the long-term, money flow into equities will rise. We do not believe that equities as an asset class will ever be dead. Equities are probably the preferred asset class for most investors over the long haul. One needs to practice patience and give time for investments to grow.
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