Bulls are back. Check your enthusiasm. - Views on News from Equitymaster

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Bulls are back. Check your enthusiasm.

Aug 22, 2000

No, we are not going back on our argument that the sentiment in the markets is likely to improve. However, several developments that are taking place should not be ignored. The stock markets seem to be buoyant and there is no denying that. FIIs and mutual funds have been big buyers. Fundamentally speaking, the scenario seems to be improving. Even the prodigal government seems to be holding back non-developmental expenditure (fiscal deficit ‘seems’ under control for the first time in years). Nevertheless there are two main concerns that investors should keep in mind while increasing exposure to equities.

The first is the development in Kashmir, which has oft been described as the most likely trigger point for a nuclear war. Although the situation seems to be ‘under control’ (and far fetched to many) a sudden escalation of violence cannot be ruled out. Such violence would surely bode ill for the markets.

Second, and a more likely event, is the rise in fuel prices. Already the rise in crude prices has exerted pressure on India's trade deficit, which has jumped significantly in the months of April and May. However, on the trade front one can draw solace from the fact that rising software exports will help in controlling the current account deficit. The more important concern is in terms of inflation, which has been ebbing in recent weeks. If inflation were to look up, concerns in terms of foreign currency/interest rate outlook would resurface.

The government has stated that it may not raise fuel prices, but instead go in for a reduction in customs duty on crude imports. The aim is to transfer a part of the receipts accounted for under the budget to a ‘below the balance sheet’ item – the oil pool account. On the whole we are still worse off, as this implies higher implied subsidy. To put it in another way, transferring revenues to an off balance sheet item will add to the government’s fiscal deficit, which if uncontrolled will have to be met by imposing higher direct/indirect taxes (!).

The stock markets have in recent days witnessed widespread buying activity. And there is ample reason to believe that a rally could be on the cards. But then again, there are reasons to believe that the rally may last shorter than anticipated. So, what should you be doing? Probably ensuring that, given your risk profile, you are exposed to equities and at the same time other investment avenues in the right proportion.

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