May 14, 2004|
Stock markets: Our view
Ever since the early exit polls and until the final election tally, the indices have not given a clear indication which way they intend to head. Market participants who gallantly backed the ruling party and hoped for continuity were in for a shock and expected the markets to tank.
Well yesterday, the continuity at the Centre came to a screeching halt. But surprise, surprise, markets ended stronger, despite the initial volatility. The participants saw some sort of a workable coalition at the centre, which has given rise to expectations of stability. So, will markets continue to gain from here on, or is it the start of a decline? We will try and answer that question.
First things first, let's see what has changed to warrant an introspection. The outgoing government seemed the most likely to push the reforms into second gear. The infrastructure projects, power reforms and untangling of the telecom sector came under its stewardship. The exit of these policy makers surely warrants caution. But not down right jitters!
For one, the likely leading party of the incoming government is no stranger to reforms. Infact, the liberalisation drive was initiated by this party in 1991. And in their manifesto too, they have clearly stated themselves to be pro-reform. However, their dependence on allies like the Left parties is to be viewed with caution. Already, in their interviews, the Left party stalwarts have raised noises about dismantling the divestment ministry and of going slow on labour reforms. What's more, one of the newly voted state governments' is looking to dole out free electricity to farmers.
So it may be a case of one-step forward, one-step back. But what does all this mean for equity investors?
In our view, the next 2-3 months will define what course the next government is going to take. What sort of message they send out through their budget will be keenly watched by investors. These are the near term hurdles for the equity markets.
At the risk of sounding repetitive, we say again, that over the years, the dependence of Corporate India on politics and the right politician has gradually reduced. It is the entrepreneurial spirit of India Inc. that has survived and blossomed despite the odds. That we believe is likely to continue despite all odds and worries on the political horizon. As an investor, if you have to back somebody, it is this 'spirit' that will come out on the winning side over the long term.
Sure, there may be give and take on the divestment and labour reform initiatives. But to say the truth, most of the key PSU's to be divested are already performing as well as their private sector peers. What we feel is that after the initial dithering, the new set of policy makers too will have to keep their steps continually in line with globalisation.
So invest cautiously if you will, but do it with a 3 to 5 year perspective, irrespective of the government at the Centre. Build your portfolio selectively and stagger your investment decisions in equities. See panic selling as an opportunity to pick and choose. We remain bullish on India over the long term.
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