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Stock markets: On the positive side...

Nov 24, 2004

It is being heard time and again that the Indian stock markets are currently in a strong bull grip, which will help the indices scale newer highs. An improving and favourable economic scenario along with significantly improved corporate fundamentals has helped attract strong and almost uninterrupted FII inflows, which has been the key driver for Indian stocks markets in the last 18-24 months. Domestic institutional participation and the entry of the retail participants into the equity arena have further helped matters.However, while the Sensex has now breached the crucial 6,000 mark on more than on a couple of occasions in the recent past, the sustenance of the same has been in question. This is because, at these levels, investors have been consistently booking profits, making it difficult for the index to scale newer highs. However, in this article, we shall not be speculating on whether the index would achieve record highs once again. In fact, while almost every investor waits for the Sensex to test its previous highs of about 6,250, we would like to highlight here a few points that could potentially drive markets to new highs in the long-term.

  • One of the key long-term growth drivers for India Inc. will be its large population base combined with a favorable demographic mix. While one may argue that this was the case even ten years ago, the situation was different then in the sense that interest rates were abnormally high for both corporates and consumers to borrow, literacy rate was significantly low and majority of the population were below the poverty line. Things have now improved for the better as new job opportunities have led to higher disposable income in the hands of people, a part of which will now aid consumer spending, in turn driving economic demand.

  • India Inc. is far more efficient at the current juncture compared to five years ago. In the mid 1990s, Indian companies went on a diversification spree. But increased competition from MNCs has taught them a lesson or two, not only forcing Indian majors to shed their excessive flab by keeping strict control checks but also emerge as more efficient and much stronger players. The effect of such restructuring and benefits of consolidation across various sectors will continue to be reflected in the future performance of India Inc.

  • Slowly but surely, governments are beginning to realize that reforms are the way forward. Though slow in nature (as has always been in the past), the intent of the government has changed and this is a sign of positive things to come. In fact there are already signs of this in various sectors like telecom, aviation, banking, power, etc.

  • Further, if one looks at the past decades and the expected GDP growth for the Indian economy going forward and compares it to the growth rates of other economies, India is clearly amongst the fastest growing economies in the world. India in recent years, has taken some good steps in terms of policy announcements for infrastructure development and also considering the reforms process currently underway in the country, the climate looks conducive for growth.

While we believe that India Inc. (on a broader scale) will continue to perform well in the medium to long-term, it is time to take a re-look at stock specific fundamentals and valuations in the near-term in wake of strong crude and commodity prices and rising interest costs. Nonetheless, to conclude, considering the various positives working in favour of Indian equities, it would not be wise to stay out of Indian equities.

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