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And you thought it's hot...

Mar 4, 2005

The Indian markets have been termed as one of the 'hottest destinations' as far as Foreign Institutional Investors (FIIs) money is concerned. Given that India Inc. has been supporting the indices gains with the earnings numbers and a robust economic growth, we take a look at the gains/losses that the Sensex has made till date in 2005 (up to March 1, 2005), as compared to global indices.

The above chart makes it evident that after the rise during the first week of 2005, the BSE-Sensex shed its gains and is currently at the same stage as during the beginning of the calendar year, while at the same time, Rs 100 invested in Brazil would have fetched a return of nearly 8% and 5% in the case of China.

Reasons for the same

  1. India Inc. announced mixed results for 3QFY05 with the PSU oil marketing companies witnessing huge dips in profits, while on the other hand auto and software companies witnessed strong results. Further, the minutes of the December Fed meet, where Mr. Greenspan indicated a faster hike in US interest rates than expected, resulted in profit booking by the main drivers of the markets.

  2. Having said that, operating margins of most companies witnessed de-growth on a YoY basis, suggesting that the companies were taking a hit on margins as a result of rise in raw material costs. High competition disallowed any pricing freedom.

  3. Crude oil prices have risen to a four-month high during the period on the back of lower inventories in the high-consuming countries such as the US and the EU and the colder weather. To put things in perspective, crude oil prices have risen by nearly 22% since November 2004 to US$ 50 per barrel.

  4. All said and done, all eyes were set on the budget with the Left parties making all the noises along with fears of higher corporate taxes leading to the selling pressure. The FII money, in fact dried up a few days before the D-day.

Post the budget day
The FM announced the budget on Feb 28 and the markets gave thumbs up to the Finance Bill, rising by over 100 points on the day, just to witness selling pressure on the following day after the "devil in the fine print" emerged. Although the budget could not be termed as a dream budget, the best thing to happen was that the bad ideas were kept at bay. Also, agriculture, which accounts for about 70% of the earning population and only 21% of the GDP, has been given special thrust, which is likely to help sustain the current GDP growth.

Notwithstanding the concerns over the fringe benefits and the cash withdrawal taxes, the budget was a good one in the sense that the movement was forward. Further, Indian economy continues to grow at a robust pace with 6.9% growth projected for FY05. We believe that this growth is sustainable over the long term. Added to this, the complete freedom given to tax payers' to choose their own instrument of investment up to Rs 1 lakh, is likely to see more retail participation in the stock markets through the mutual fund route over the long term.

To cut a long story short, as Ajit Dayal - Chairman, Quantum Advisors says, and we quote:

"On a very macro view, I would say that if you have Rs 100 to invest in equities, invest half of it now, put it to work, and wait for the other half. And one should basically adopt a kind of a systematic investment plan where you have got a certain allocation to Indian equities. In that sense, give me half of the money to manage now and give me the other half when the market cracks. So it means that you should keep on investing every quarter for the next year, and you should be fine."

  • Read Ajit's view on the budget and the stock market


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