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The right strategy

Nov 14, 2003

The fall on the bourses yesterday has meant that the indices are marginally in the red for the week so far. With two days of trading remaining for the week (Saturday is a trading day this week), more profit taking cannot be ruled out. But is this a sign of things to come?The indices have continued to hold strong despite concerns about the fact that this strength may have come on the back of some operator driven 'hot money', which may flow out as soon as it has come in. The skepticism stems from the fact that it has happened in the past, and it is the retail investors who have been left at the short end of the stick every time the indices have surged.

While there is no doubt that the Indian indices were undervalued for quite some time and deserved to be re-rated upwards, the sharp rally have raised some worries. Thankfully, the buoyant Indian economy numbers as well as India's growing positive perception globally does offer a reasonable justification for the market upside. But as said earlier, have the Indian stock markets come up too far, too soon?

Well, at 16x trailing 12 months earnings, the NSE-Nifty has come up reasonably high. While some may argue that the global markets have received P/E's of over 25 and above over the years, so why not India? Nothing to dispute that! The only thing one worries about is that India is still a developing economy with an ever-increasing fiscal deficit. No doubt, India has a lot of growth potential, but we would be more comfortable if the rise was gradual and based on FY05 and FY06 visibility.

We believe that India, as one of the fastest growing economies in the world today, has the long term wherewithal to continually attract investments. However, investors entering the markets at these levels have to come in with a long-term growth vision (3-5 years), tone down their return expectations and adopt a staggered investment approach. Also, a good strategy in these uncertain times would be to stick with quality and not get sucked into rumours or hot tips. It is unreasonable to expect the markets to continuously zoom. At these levels, short-term mentality is unlikely to work and more often than not, investors will as usual end up at the short end of the stick.

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