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Last week’s poll: Our view

Jul 15, 2003

Markets for the last couple of months have been moving in one direction i.e. up. Yes, there has been an odd correction here and there, but overall the undercurrent continues to remain strong. To get a view what the retail investors think about current index levels, we asked them what would they do in the current market scenario, Buy, Sell or Hold?30% of the respondents polled that they would continue to ‘Buy’ at these levels, indicating their confidence in the economic fundamentals. Another 30% opted for ‘Hold’ indicating that they have already invested at lower levels and are satisfied. They seem to believe that their investments have further potential to go up, but would not risk putting in more money into equities. But for the remaining 40%, the ghosts of past scams seem to have caught up and they would rather ‘Sell’. The 2,600-2,700 levels are still fresh, and the current rally to them, seems ready to go bust. The scare too, is not without cause. As past experiences have clearly shown that post a big rally Indian markets have always seen a scam.

As far as our view is concerned, on a two-year perspective the markets continue to justify the buoyancy shown due to the following reasons:

  • India is one of the leading emerging markets, with GDP growing at healthy 5-6% annually. This gives a clear indication that India Inc. has got a lot of potential, which is still untapped. What’s more, the CMIE has revised its estimates of GDP growth from 3.7% to around 6% for FY04. This is a good sign.

  • The government in the last few years has also taken proactive steps in the development of the economy. For instance, introducing power reforms, infrastructure development, increasing FDI norms and bringing down the lending rates. Overall, our economy has become more competitive and flexible. The future looks encouraging.

  • The BSE Sensex currently trades at a P/E ratio of 13.5x FY03 earnings, which is much lower when compared to developed economies. The Sensex constituents had logged in a consolidated 35-40% growth in earnings during FY03. Even if we assume a 15% growth in earnings during FY04, the Sensex valuation then becomes 11.7x forward FY04 earnings. What’s more, the infrastructure measures are likely to show their true worth post 2004. That will mean an even better 2005.

  • India has traditionally been an agriculture driven economy. Rains are a driving force for the country’s growth. In the last three years rains have been a let down, but this year the Indian Metrological Department has declared that there would be near normal rains, indicating a healthy FY04.

The government initiatives on the infrastructure front are likely to benefit the manufacturing sector. Sectors like cement and auto have seen a sharp recovery in demand in the last two years. The economic impact on government spending is visible with core sectors clocking impressive growth rates.

But even in this healthy scenario, some sectors could indicate concerns. The banking sector is a clear example. Though a lot of positives have happened for the sector, the value will only be unlocked in the next few years. And that too, is dependent on the individual banks strategy to move forward.

A deterrent for the markets going forward could be the upcoming elections. Past experiences have shown that uncertainty normally prevails during the elections. The question that arises is why are the elections so important while making any investment decisions? The answer to this is that in a top-down approach, which is a vital factor for making investments, politics play a major role.

Even though we are encouraged by the overall macro perspective, the key to successful investing remains – pick and choose. As the SEBI chairman had recently quoted ‘one should not be led to the garden path.’

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