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

Top 5 Recent IPO Developments You Should Know (Views On News)

May 12, 2021

So far in 2021, IPOs in India have raised nearly US$ 3 bn, the best start to the year since 2018.

How Did Mindtree Perform in Q4FY21? (Company Info)

Apr 20, 2021

Here's the rundown on the company's latest quarterly results.

Why is Bullion so Volatile Now? (Fast Profits Daily)

Jun 17, 2021

Why have gold and silver prices become volatile recently? Find out...

Cut the Noise and Hold these Stocks FOREVER (Profit Hunter)

Jun 17, 2021

A sure shot way of creating wealth is to not disturb the process of compounding.

Axis Quant Fund: Targets Quantitative Approach to Generate Alpha (Outside View)

Jun 16, 2021

PersonalFN analyses the features of Axis Quant Fund and explains the potential this fund has to offer to its investors.

More Views on News

Most Popular

Hotel Stocks Will Reward Investors (Fast Profits Daily)

Jun 8, 2021

This is why I'm bullish on the hotel and hospitality sector.

My 'Unlock' Investments (Fast Profits Daily)

Jun 11, 2021

The best unlock investments you can make in the market.

The Most Visible Sign of India's Revival is on Two Wheels (Profit Hunter)

Jun 9, 2021

Investing in the best stocks could result in wealth compounding on a massive scale.

How I Discovered a 400-Year-Old Open Secret to Extreme Wealth (Profit Hunter)

Jun 11, 2021

Charlie Munger's open secret about investing success.

More

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Jun 17, 2021 10:45 AM

MARKET STATS