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Stockmarkets: There is more to it...

Sep 9, 2005

...than meets the eye! Or, so it seems! As the Indian indices scale new heights each week (the latest is 8,000 for the BSE-Sensex), self-proclaimed market experts set higher targets for the markets to chase. Fundamentals, long term potential or valuations, nothing seems to justify the intimidating heights that the indices have breached. What is more interesting to note, is that, the foreign investors seem to have more faith in us than we have in ourselves! Here we try to fathom some reasons as to what is it that makes India such a favoured investment destination. Consistency is the key: While most of the Asian economies (led by China and India) have tread on a steady growth path (albeit on a lower base) in the last decade, their counterparts in the developed world have struggled to counter various macro economic shocks and keep the growth engine going. This has resulted in a lack of consistency in the GDP growth of the advanced economies vis--vis that of the Asian ones. The same has translated into better reliance on the developing economies with regards to delivery of performance and sustenance of growth.

Stronger fiscal position: While the fiscal balance position of the Asian developing economies has marginally improved in the last couple of years, those of the advanced economies have steadily deteriorated. The rise in crude oil prices is not helping conditions improve either. On the other hand, a sharp surge in inflow of invisibles and trade surpluses due to low cost manufacturing (e.g. China) and low cost services (e.g. India) has helped consolidate the positions of the developing Asian nations. In fact, while the consolidated fiscal position of the Asian economies has remained almost stagnant over past two years, a steady rise in the debt levels of the advanced countries has persuaded investors to look for alternate investment venues. No wonder, most the funds have found their route into the 'emerging economies'.

Currency appreciation: The appreciation in currencies of developing nations, mainly on account of the weakness of the US dollar has acted as a dual benefit to the overseas investors putting their money into Asian economies. This is because the depreciation in value of the US dollar will fetch them (largely the US investors) higher returns on their investment, over and above the returns garnered through investments in emerging markets.

Higher rate of return: Last but not the least, the prime factor that attracts investors to the so-called 'emerging economies' is the high rate of returns on assets offered by them. So much so, that the returns adequately compensate for the high beta (indicative of market risk) of these stocks. In other words, investors already factor in the possible risk of losses that they are exposed to due to such investments. To put things into perspective, banks offer loans at higher interest rates on risky assets so as to garner higher yields that can compensate them for the delinquencies. Thus, a bank would not mind NPA levels of 7% on credit cards that offer yields up to 16% to 17% per annum. Similar is the strategy followed by the overseas investors.

So what should investors do?
As the legendary investor, Benjamin Graham had indicated, instead of registering choices on the 'voting machine' (his definition of markets in the short term), investors should weigh their investment strategies carefully on the 'weighing machine' (markets in the longer term). As such, small investors need to weigh in the pros and cons of their probable investment decision before risking their money. While relying on fundamentals is a sure shot way of garnering adequate returns in the long-term, relying solely on the foreign money might lead you to nowhere!

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