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Stock markets: Fundamentals take over - Views on News from Equitymaster
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  • Dec 2, 2002

    Stock markets: Fundamentals take over

    The Indian stock markets have rallied by almost 12% in the last one-month or so. Backed by positive news flow from the tech sector as well as renewed buying interest in old economy majors like Reliance and HLL, indices outperformed key global markets. The question is will this trend continue?

    We would once again like to highlight five key positives that could potentially drive markets to new levels in the long term. Forget about what FIIs are buying, how MSCI and other are upgrading/downgrading Indian stock markets and disinvestment. The reasons for optimism are different, if a long-term stock market investor were to interpret the current rally.

    1. One of the key long-term growth drivers for India Inc. will be the large population base combined with a favorable demographic mix. One may argue that this was the case even before ten years. But ten years ago, situation was different 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 improved for the better.

    2. India Inc. is far more efficient at the current juncture than even five years ago. In the mid 1990s, Indian companies went on a diversification spree. But increased competition from MNCs has taught a lesson or two and thus Indian majors have shed flab since the mid 1990s. The effect of such restructuring and benefits of consolidation in sectors will trickle down in the future.

    3. Significant decline in interest and RBI's bias for a softer interest rate regime in the long run is also a big positive for India Inc. As most Governors of RBI believe, strength of the banking system is vital for long-term sustainability of the economy. One can also say that the banking system is more efficient now than independence. Foreclosure and NPA ordinance has given a big boost to the banking sector and is a big leap forward.

    4. Slowly but surely, government's are beginning to realize that reforms are the way forward. Though slow in nature (as always been in the past), the intent of the government has changed (to an extent) and this is a sign of things to come.

    5. To support everything, from a stock market perspective, valuations at the current juncture, are significantly lower when compared with international markets. Market capitalisation as a proportion of GDP is estimated at around 24% as against the international average of 45% (BSE market capitalisation is around US$ 115 bn).

    Having said that, the US-Iraq tussle is a cause of concern. The repercussions of a war in the Middle East could significantly affect growth prospects of the Indian economy in the near-term. Nevertheless, positives outweigh negatives at the current juncture.



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