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Stick to quality

Mar 23, 2002

The week saw heightened tensions within the ruling coalition, thus raising fears of instability at the centre. Though at this point it doesn’t look as if the coalition will break, but the rising strife within the political establishment is a cause for worry. Also, the continuing internal skirmishes between religious leaders only adds to the fears. India is anyway coping with a rising fiscal deficit. If another election comes soon, then the market participants can be expected to scurry for cover.

Rising crude prices are another sign of concern. With the world slowly turning into a hotbed for spats between countries, especially in the Middle East, the strengthening of the oil prices cannot be ruled out. With India having chosen to dismantle the APM post April 2002, any hike in crude prices going forward will result in products like petrol and diesel becoming dearer, giving rise to inflation. If the rise continues, then the government may find it very difficult to pursue its stated policy of a softer interest rate regime. The government has shown in the past that it is not averse to making a turnaround in its stated policies, as has happened in the case of dividend tax recently. So, could be suspicious of the government’s stated objectives.

However, despite the aforesaid concerns, there are quite a few positives that can give impetus to the stock valuations. Commodities are showing signs of a revival, auto sector is on the recovery mode, and the good news for the new economy sectors is trickling in. Divestment is alive and kicking. Also, with the US showing signs of strength, the Indian tech sector is likely to benefit. Valuations of some key old economy blue chips are compelling.

Despite this one sees the bourses making sideway moves. It is clear that the investors realise that India has good potential as an investment destination but the concerns mentioned above are making them cautious. Any improvement in the political situation as well as demand from rural India can change the whole valuation game. Investors need to stick with the best sectors, and among them the companies with impeccable management credentials.

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