Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Stockmarkets: Read, before you leap! - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jun 30, 2005

    Stockmarkets: Read, before you leap!

    As we are well aware, the Indian stock markets have hit new lifetime highs in the recent past. The bulls have had a party on Dalal Street. They have been aided by factors such as ample liquidity through strong Foreign Institutional Investors (FIIs) inflows, powered in recent times by Japanese funds wanting a slice of the action, overall buoyancy in the markets, improving sentiment in sectors such as FMCG due to rains hitting the country and strong expectations of the continuation of the 'India story' over the longer term.

    However, the fact remains that at such high levels, with the indices in uncharted territory, investors must exercise some amount of caution. Even after Tuesday's 100-point plus correction, indices are still well over the 7,000-point mark. Where the indices will go tomorrow or in the next week or month is anyone's guess. We take a look at factors that have driven the markets upward in recent times, present our concerns regarding this market and reason as to what we can expect going forward over the longer term.

    Factors causing the bull-run
    Domestic consumption and favourable demographics:India's population is the largest in the world after China, at over 1 billion people. Such a huge domestic market makes a compelling reason to sell one's products and services in India. However, the major point to note is not just the enormity of our population itself. If we dig deeper, we find that a major portion of our population is below the age of 30. Apart from that, data from NCAER shows that the high-income class is also growing at a steady pace.

    This implies that in the next ten years or so, purchases of consumer durables, FMCG products, cars, petroleum products, computer hardware, software and a myriad of other items by this class is going to power the economy forward. Undoubtedly, exports are also growing fast, but given its massive population, India remains largely a domestic consumption-led economy, unlike, say, South Korea or Japan, where the small populations of these countries and also an indifferent attitude to spending by the Japanese people has resulted in corporations in those countries having to resort to exports to drive growth. Consumer spending was estimated at Rs 21 trillion in 2004 and is growing at a rapid rate. Thus, long-term expectations about strong domestic consumption-led growth going forward have driven markets upwards.

    India Inc.'s earnings growth: Combined with this, Indian companies continue to show robust earnings growth. This has averaged in the region of 15% to 20% for the Sensex companies and more importantly, it is the quality of earnings that has been good. There needs to be sustainability in earnings growth and that can only happen when growth comes from 'core operations' rather than 'other income'.

    Driven by this factor, and others, FIIs have been pumping record amounts of money into the Indian stock markets since the beginning of 2003. The FII ownership in Indian stocks has risen considerably during this period. They have been among the major drivers of the bull-run witnessed in the last two years. In recent times, Japanese investors have started India-dedicated funds and pumped in millions of dollars in the past few trading sessions.

    * 2005 to date

    Our concerns
    Spiraling oil prices: Quite clearly, spiraling oil prices are a cause for concern. Oil prices have hit record highs of late and a secular up-trend on this count will not augur well for Indian corporates. This could eat into corporate profits through higher input costs on the corporate side and higher petroleum prices on the consumer side, raising the specter of inflation and reduced consumer spending. This could affect sectors such as auto and commercial vehicles (CVs) and other sectors as well, due to the adverse effect on consumer spending.

    US interest rates: With the Federal Reserve resorting to finally increasing interest rates since July 2004, a further upside to US rates is only expected. Depending upon the quantum of the rise and Mr. Greenspan's comments about the way he views the US economy, FII flows could go back to the US, since the yield on US assets would rise. It should be noted that a certain amount of FII money could be just 'hot money', which is a 'fair weather friend' and at the slightest instance of danger, 'flies out' of the country!

    Linked to this point, the US economy is undoubtedly the driver of the global economy today. It accounts for over a third of global GDP. US consumption fuels global growth and if the US sneezes, the entire world will get an infection! Given the frothy property market in that country further compounded by the fact that it is mainly a debt-driven bubble, a bursting of the bubble could mean considerably reduced spending power of the US consumer due to an increasing debt-burden and by extension, a slowdown in global growth, which will surely affect India in some way or the other.

    So, what to expect?
    In the near future, it is difficult to predict exactly as to which way the markets are going to go. Major drivers we believe will be the progress of the monsoons and the upcoming first quarter results of corporates. Any negative surprises on this front, particularly for major companies could result in negative sentiment in the near term.

    However, we have always maintained that in any market, be it a bull market, bear market or flat market, there are always some stocks that are worth buying. We would surely advise a bottom-up approach to stock picking, as a number of stocks, particularly mid-caps, have run up far too much and are not justified by their fundamentals. Therefore, investing in fundamentally sound companies at reasonable valuations is the best bet for an investor to make money in the long term.

    Given solid earnings growth expected over the next few years, apart from factors such as a favourable demographic profile resulting in strong domestic-led consumption, going forward, improving quality and sustainability of earnings, strong export-led growth in sectors such as software, auto ancillary and pharma and increasing global recognition of the 'India story' leading to even more FII participation, we remain positive on the Indian markets from a long-term perspective.



    Equitymaster requests your view! Post a comment on "Stockmarkets: Read, before you leap!". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Were You Lured By Mr Market's Bait? (The 5 Minute Wrapup)

    Aug 23, 2017

    Mr Market lured investors into believing they'd bitten into a crash. Did you take the bait?

    Deep State First (Vivek Kaul's Diary)

    Aug 23, 2017

    Nowhere was the darkness deeper than in the nation's capital. There, no light shone. No flicker of awareness...observation...learning...or reflection appeared.

    Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

    Aug 22, 2017

    It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

    Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 23, 2017 02:39 PM