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Where to invest?

Mar 4, 2004

The biggest dilemma of a retail investor at current juncture is to identify a sector where he can park his funds over long term and expect good returns. Investment in equity markets at the current juncture from a short-term investment horizon can be unfavorable because of uncertainties like elections, FDI inflows and monsoons in 2004. But if we look at the long-term perspective, we see a lot of positives.First and foremost is the rise in infrastructure spending by the government (like building roads). The spending is likely to create employment opportunities for the rural mass and also provide access to market for selling agricultural products. So, rural income per se, is likely to grow over the long term. Obviously, this will be beneficial for FMCG companies, as the reach will improve significantly. Another set of change triggered by the government is reforms on the power sector front.

The capex plans of private and public sector companies in the power sector reflects the level of confidence among corporates, as far as implementation of reforms is concerned. Lack of availability of power has been affecting demand for consumer goods in the last decade. Once this hurdle is removed, we are likely to see higher demand for consumer goods. This is likely to be pre-empted by housing demand as well. Cement companies also tend to benefit from infrastructure activities in the economy. Engineering sector companies depend to great extent on power and infrastructure development for their order booking. Therefore, we see a broader impact of this infrastructure spending on the Indian economy in the long-term.

Farmers in rural areas depend on power to great extent for irrigation purposes. Availability of power will improve irrigation facilities resulting in better productivity. Moreover, if power and roads are available in rural areas, industry will definitely shift towards smaller towns providing better employment opportunities for the people there. These employment opportunities will definitely increase the purchasing power of the people which again will be a boost for FMCG, automobile and consumer durable companies.

Another growing sector of Indian economy is services. Outsourcing is turning out to be one long-term growth opportunity for the Indian economy because we are cost competitive and have skilled manpower. Outsourcing opportunities also increase the employment level in the country.

It may sound as if we are talking of just macro-issues. But we believe that there are exciting investment opportunities for the long-term. We would like to conclude by saying that looking at the growth prospects of the various sectors, one can invest in equity markets for decent returns from a long-term perspective. However, one should invest in stocks across sectors in order to have diversification. It is very important for an investor to identify his investment horizon and risk appetite in order to have a win-win situation. For example, if one with lower investment horizon invests in a power company, he may end up losing his money because it takes time for new projects to yield desired return. On the other hand, a person investing in a FMCG company is likely to be more defensive. So, pick and choose. All that shines is not gold!

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