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Reality check... - Views on News from Equitymaster
 
 
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  • Apr 22, 2005

    Reality check...

    The indices gained yesterday. But it will not bring a sense of relief to investors who have been following the market goings on over the past couple of months. With equity markets globally in a state of dilemma, not much will change towards India overnight. But is it the end of the India story?

    It is a known fact that most emerging markets and even key western markets have been on a slippery ground in recent times. With US consumer price index indicating a sign of inflationary pressure, US Fed chairman's strategy to control economic excesses in the world's largest economy is taking shape. It is a given that US rates are on their way up, only the speed and the quantum of the hikes is not really known.

    If the rate hike is faster than anticipated, then Foreign Institutional Investors (FIIs) flows could slow down, drying up liquidity in the emerging markets. However, in our view, despite the bonhomie, sustainability of growth of the US economy is still not really visible. And even if it was, there are too many worries it has created in the global investor's mind, which are unlikely to go away any time soon.

    The pressure on the US economy over the past few years has been a blessing in disguise for other large emerging economies. In the past couple of years, global investors have really stepped out of their US horizon and looked at other regions. We believe that even if the US economy does sustain its current growth rate, the newer economies are unlikely to come in as an 'after thought' to global investors.

    Sure, the next couple of months may be choppy, but longer term, the India story looks good. Even if India trudges along its usual 6%-6.5% GDP growth, that itself offers potential to equity investors to grow their capital, beating most other investing avenues. Though inflationary pressures are also evident in the economy, it is unlikely to be a very sharp rise in interest rates.

    For India, FY06 has started on a good note. Structurally, VAT has been implemented, which has the capability to bring in cost efficiencies in the system over the longer term, despite early worries. Efforts are on to allow FDI in retailing and other sectors. Early indications are that the monsoon will be 'normal' this year. This again is a proven positive for the Indian economy. All in all, the benchmark indices at 13 times forward FY06 earnings, does not seem to be steep. Pick and choose!

     

     

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