Markets: Where to from here? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Markets: Where to from here?

Sep 26, 2003

Though not surprising, the recent rise in the stock market, as usual, has taken a section of retail investors by surprise. Now that the stock markets have risen to 4,300 levels compared to the lows seen in early 2003, there is a sense of optimism amongst investors. But is it warranted? Consider in brief key positives and negatives for the stock market from a short-term perspective of one year and beyond that.

  • Firstly, according to CMIE, the economic research agency, the country has witnessed rainfall in excess of 3% of normal levels for the first half of the fiscal year 2004. The number of regions that have seen excess rainfall as a percentage of gross cropped area in this period is at 28%, highest in the last 5 years. Percentage of gross cropped area that have received normal or excess rainfall is estimated at 95% by CMIE, which is also a five-year high. Monsoon, per se, have not disappointed the stock markets.

  • What this good monsoon means to the agricultural sector, that has suffered in the last three years due to the vagaries of monsoons, cannot be understated. While CMIE expects agricultural production to increase by 9% in FY04, food grain output is likely to touch 202 MT. Just to put things in perspective, this is the fourth highest in the last nine years.

  • Given the fact that almost 70% of the populace depends on good agricultural output for daily livelihood, higher production augurs well for the rural sector. Income level in the hands of the people could rise thus providing a fillip to consumption, albeit to an extent. The rather strong co-relation between the agricultural sector and GDP growth is exhibited in the graph below. This combined with other external and internal economic indicators like interest rates, inflation, forex reserves and foreign money inflow adds to the optimism.

  • Coming to corporate profitability, most of the index companies, if one were to take this as a sample, have restructured or close to completing the restructuring exercise initiated in 1997. Significant improvement in productivity (sales per employee), asset turnover (this indicates the effective utilisation of fixed assets), interest coverage, reduction in working capital requirement and the consequent release of cash to retire high cost debts are big positives. Given the fact that revenue prospects are promising for FY04 and in the long run, net profit could grow at a much faster rate. Therefore, if one were to look at the P/E ratio (price to earnings), the 'E' side looks promising. Just to put things in perspective, a study by us shows that net profit of index companies have grown at a CAGR of 17% for the period between FY97-FY03.

  • Coming to the foreign money inflows, the slowdown in US, European and Japanese economies have resulted in global fund houses looking at emerging markets as investment avenues. Since India is relatively less reliant on exports for growth, both these countries could be in the thick of the action in the long term.

Outstanding investment
(Rs bn) July'02 July'03 % change
Manufacturing 2,688.9 2,946.9 9.6%
Mining 7,374.2 6,771.8 -8.2%
Electricity 5,198.0 4,396.3 -15.4%
Services 5,539.0 5,743.2 3.7%
Irrigation 1,156.3 1,155.2 -0.1%
Total 21,956.3 21,013.4 -4.3%
Source: CMIE

But there are some aspects that are worrying as well.

  • The forthcoming elections in India could impact the 'P' side of P/E ratio. While it is not practical for one to predict which party will gain majority in the elections, coalition politics seems to be the trend. Whether a change in the government will result in slowing whatever initiatives the current government has initiated (like divestment and infrastructure projects) remains to be seen. Despite all the political hardships that the country has had, the economy has grown at around 6% in the last decade. As Dr. Marc Faber has said, it is actually surprising that India has grown despite government related issues in the past.

    Click here to read the exclusive interview by Dr. Marc Faber with Equitymaster.

  • Though monsoons in the first half have been good, the second phase of rainfall that the country receives is also of significance. Moreover, given the fact that farmers in general have had an erratic period in the last four years in terms of produce, whether one good monsoon is enough to provide a fillip to rural demand per se remains to be seen.

  • Another medium term concern is the country's high combined fiscal deficit to GDP ratio of over 10%. This could curtail growth in the future.

Given this backdrop, what should a retail investor do? From growth and valuation perspectives, the Indian market still offers attractive investment opportunities in equities. Immense potential in the service sector, especially software and the financial aspect of services, and emerging opportunities in sectors like manufacturing and pharmaceuticals at the global scale, strengthens one's belief in the Indian stock market. GNP per capita, in all likelihood, is expected to grow at a faster rate than 10% seen between FY71-FY02 (12% between FY91-FY01). However, not all companies are geared up to meet the emerging challenges. As always, look at the downside before the upside.

Equitymaster requests your view! Post a comment on "Markets: Where to from here?". Click here!


More Views on News

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

ONGC to NMDC: Here are 5 Stocks Value Investors Should Closely Track (Views On News)

Nov 26, 2021

Before investing in value stocks, research the company and gain insight into why the market is discounting it.

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

Has Your Mutual Fund Scheme Invested in Paytm? Here's What You Should Do... (Outside View)

Dec 1, 2021

One97 Communications (Paytm) shares continue to erode the wealth of investors. If any of your mutual fund schemes hold shares in it, you need to be careful and track its performance more carefully in future.

Is this India's 'Reliance Power' Moment? Here's How to Prepare for it (Profit Hunter)

Dec 1, 2021

Investors forget that market cycles are inevitable and there's no such thing as a free lunch.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

How to Find Your Next 10-Bagger in this Market (Profit Hunter)

Nov 19, 2021

The #1 make or break factor in your portfolio you shouldn't ignore.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Dec 1, 2021 03:31 PM