Apr 28, 2005|
Clouded by concerns, but..
Markets currently seem to be in a state of flux having gone nowhere in the past three months. Predictions for the BSE-Sensex touching the 7,000 mark (it almost did!) and some even going a step further (or rather many steps further) and predicting the 8,000 levels, seem to have suddenly died down. While most of the market participants continue to believe (with a slight apprehension though) that the Sensex will indeed breach this coveted mark in the current calendar, the voices seem to have turned somewhat muted now. And this is despite the various positives working in favour of Indian equities.
Some of the positives include strong March quarter results by most of the companies across sectors (including software), reasonable topline growth indicating firm demand, improvement in operating margins as companies improve their efficiencies to counter increasing costs, positive outlook for most of the sectors going forward and last but not the least, favourable market valuations of 11x-12x on the basis of FY06 estimated earnings. But the markets currently seem to have shifted focus on some other indicators that could decide the next course of action for the bourses.
To begin with, one of the important factors that have seemingly kept investors on the back foot is the impending hike in petroleum product prices, especially petrol and diesel. With international crude oil prices hovering largely in the vicinity of US$ 55 per barrel mark since a while now, domestic oil marketing companies, which have not been allowed to raise prices since November last year, are now asking for a hike of Rs 4 to Rs 5 per litre. This, if happens, could actually prove to be detrimental for Indian consumers, companies and the economy as a whole for reasons discussed time and again like reduced consumer affordability owing to a rise in prices and the negative impact on corporate profitability due to higher input costs along with the already prevalent strong metal prices, which could together retard the country's economic growth.
Another factor is the fear of Foreign Institutional Investors (FIIs) money finding its way back to the US economy as interest rates in the US inch towards the 3.5% mark during the next couple of quarters. While this fear has not come to be true as yet, despite the US interest rates climbing from a meager 1% to 2.75% in the last one year or so, ignoring the impact of the same would not be a rational move. However, investors must note that on the one hand, while there is the risk of the already existent money in the markets going back to the point of origin, at the same time there has been a considerable interest generated amongst foreign investors, which include the likes of Fidelity and CalPERS, who have already marked their entry into the Indian markets. Increasing FII interest, which can be gauged from the fact that FII registrations with the stockmarket regulator, Securities and Exchange Board of India (SEBI), has increased by almost a third from about 500 in December 2003 to almost 700 currently.
Another key determinant of the growth of the Indian economy is monsoons. The Indian Meteorological Department (IMD) recently predicted that the monsoons in the country this year would 98% of the long period average and the probability of this happening is a good 75%. While it would be too early to take a call on the stockmarkets from this point of view considering the erratic nature of monsoons, investors must note that the behaviour of monsoons could very well play an important role in determining the next direction of the markets. With near 65% of the Indian population dependant on agriculture for their income, their consumption and spending patterns depends at the mercy of the rain Gods. Depending on the monsoon pattern, investors may need to re-consider their equity investment allocations. In case of favourable monsoons, industries like consumer durables, auto, FMCG, banks, etc. may require greater attention considering their correlation to monsoons, whereas otherwise, sectors like software, engineering and cement could see greater investor interest.
To conclude, until some of the above concerns (there could be more) continue to cloud investor sentiments, what is likely to be seen, at least in the near term, is a condition where investors would want to wait and watch before they make investments in equities, as there seems to be no short-term economic triggers. As far as our prediction for the markets is concerned, our readers would know that Equitymaster does not believe in the 'number game' and instead believes in the long-term (3-5 years) theory of investment in a staggered manner, which is primarily aimed at creating wealth and to mitigate the ups and downs of the markets. We believe that fundamentals do not change by the day, week or month. If the fundamentals and performance of the company are strong, investors will acknowledge the same in due course of time.
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