The upside and the downside - Views on News from Equitymaster

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

  • MyStocks

MEMBER'S LOGINX

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

The upside and the downside

Sep 30, 2004

After gaining ground in the last month or so, the stock markets seem to be taking a breather as of now. Amidst promising fundamentals, we believe that investors need to take a very balanced view between the upside and the downside at the current juncture.Lets start with the few of the upsides first...

  1. With GDP expected to grow by around 6% in FY05 and at a higher rate beyond this fiscal year, there is every possibility that growth at the topline level for corporates will remain strong. Based on our study, over the last five years, the compounded growth in the topline of the Sensex companies was at 15%. If one were to take a broader universe of around 187 companies under the Quantum Universe , the topline growth for the same period was at 11% levels. We believe that if the Indian economy is expected to grow by around 13% to 14% on a nominal basis (i.e. real GDP growth plus inflation), there is visibility in corporate sales growth. This is a positive for the stock market.

    Real GDP growth comparison - One leg up!
    (% growth)200220032004E2005E
    World3.0%3.9%4.6%4.4%
    Developed nations    
    USA2.2%3.1%4.6%3.9%
    UK1.7%2.3%3.5%2.5%
    Japan-0.3%2.7%3.4%1.9%
    Emerging markets    
    India4.7%7.4%6.8%6.0%
    China8.0%9.1%8.5%8.0%
    Thailand5.4%6.7%7.0%6.7%
    South Korea7.0%3.1%5.5%5.3%
    (Source: CMIE Monthly Review - Sep'04)

  2. There have been a number of policy decisions in the last five years, which were aimed at attracting more capital into the country (hike in FDI limits and increased scope for private-public sector partnerships in infrastructure projects and so on). With the government showing keenness in improving the basic infrastructure facilities in the country, there exist a strong trigger for consumption led growth. Infrastructure spending has a positive impact on general income levels in the country (directly and indirectly).

    Just to put things in perspective, while overall bank credit has grown YoY at around 24% (Source: RBI Weekly Statistics), non-food credit has witnessed a robust growth of 25% YoY, which to an extent, indicates that credit demand is gaining pace.

  3. The services and the manufacturing segments of the Indian economy continue to gain in strength. Due to the their cost competitiveness on a global scale, the potential for India to emerging as a outsourcing destination remains bright. While it is very difficult to quantify as to what extent will the benefit be, the case is stronger than ever before.

Now consider the key downsides...

  1. Oil prices have risen very sharply over the last one and a half years. At some stage, this is likely to slowdown economic growth when one considers the fact that the country is import dependent to the extent of 70% of its domestic requirements. Inflation has inched higher. While interest rates in key global economies are northbound, we believe that there exists a possibility of interest rate rising in India as well. This could impact valuations of stocks.

  2. While in 2003, strong growth prospects was supported with cheap valuations, it is not the case now. Further rise in stock prices from the current levels is likely to be led by corporate performance. While prospects remain promising, we believe that in some sectors like auto, banks, commodities and pharmaceuticals, some stocks have run ahead of their fundamentals. The CAGR in net profit of Sensex over the last five years at 16% has outpaced the topline. Though there is scope for cost cutting, competitive pressure is likely to exercise a downward pressure in margins from hereon. The Sensex is already currently trading at a price to earnings multiple of 15 times trailing twelve months earnings.

Having said that, we also believe that the returns from equities, as an asset class, over the next three years, is likely to be higher than say, debt market instruments. In this context, within one's risk-return profile, equities have a solid case.

Which sectors to invest in? We would exercise caution when it comes to high capital-intensive sectors like automobiles and commodities because margins are close to the peak and competition is intensifying. We would suggest investors to consider investments in infrastructure based sectors and if one believes that consumption is likely to increase, there is a case for FMCG as well. There is value in key software and pharmaceuticals stocks as well from a three-year perspective. Happy investing!


Equitymaster requests your view! Post a comment on "The upside and the downside". Click here!

  

More Views on News

How Much Money Should an Investor Set Aside for Trading? (Fast Profits Daily)

Sep 21, 2020

In this video, I'll give you a simple equation which you can use to decide how much money you can set aside for trading.

Kotak Standard Multicap Fund: Strategizing Growth with Focused Approach (Outside View)

Sep 21, 2020

PersonalFN's analysis on the features and performance of Kotak Standard Multicap Fund.

Sensex Can Go to 25,000 Before it Goes to 60,000. Are You Prepared? (Profit Hunter)

Sep 21, 2020

Am I expecting a big crack in the Sensex and what next?

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

Sundaram Bluechip Fund: Will Hold the Stable Horses (Outside View)

Sep 18, 2020

PersonalFn briefly outlines the newly launched NFO note HSBC Corporate Bond Fund.

More Views on News

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why am I Recommending Caution? (Fast Profits Daily)

Sep 9, 2020

This is why I have changed my short-term view on the market.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Sep 22, 2020 10:07 AM

MARKET STATS