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Stockmarkets: Introspection helps! - Views on News from Equitymaster
 
 
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  • Dec 22, 2003

    Stockmarkets: Introspection helps!

    In the month of August, when the Sensex was hovering at the 4,200 levels, we did a story comparing gains in the BSE-Sensex with those on other major global indices - the Dow, FTSE and Hang Seng. While the Indian index had clearly outperformed the other indices when compared for gains over January 2002, we believed that Indian stock markets were shifting from times when they mirrored sentiment on the American bourses to being more internally guided. From there on, the Sensex has traveled to greater heights and it now stands (and ready to move!) at the 5,500+ levels.

    All data pertaining to year 2003. Returns are calculated on Rs 100 invested on Jan. 01 2003.

    The factors that have helped gains in the Indian equity markets - good monsoons, strong Foreign Institutional Investors (FIIs) inflows and implementation of reforms - continue to play their part in building up the euphoria surrounding the growth prospects of the Indian economy. However, while we believe that movements in the Indian markets are now 'more' guided by internal factors (as mentioned above), they are not totally insulated from the events happening on the global scale. And one such event that has raised the 'optimism-bar' for Indian investors is the recovery in the US economy.

    The US is the largest market for Indian exporters and any improvement in its economy from the downturn of the last two years is bound to affect sentiments back home (in India). The recovery in the US economy is likely to give a fillip to the Indian outsourcing story as American corporations, in their efforts of becoming more cost competitive, are likely to continue with their outsourcing initiatives. While the US economic downturn, in fact, acted as the genesis of this Indian outsourcing story, the recovery would bring to Indian companies outsourcing contracts of much larger sizes.

    Another factor associated with this US economic recovery that is likely to affect movements in Indian equity markets, lies on the interest rates front. Never ever in the past were Indian investors so obsessed with movements in the US interest rates as they are now. And this can be seen in their (Indian investors') increased interest towards the US economic policy regarding interest rates. While the Fed has maintained the Fed funds' rate at their lowest levels since the last 45 years, citing reason that this would fuel the ongoing recovery, investors in India need to take caution as any development on this (the US interest rates) front is bound to affect flow of capital to the Indian markets - both debt and equity.

    On a final note, while we believe that the Indian markets have stopped imitating their US peers, the herd mentality still rules the roost internally. Speculators (and not investors) continue to call shots (the recent escalation in prices of software and banking stocks are some of the examples). The need of the hour for investors is, thus, to be more introspective while making investment decisions. Investors also need to gauge their risk-return profile and fundamentals of their probable investments in an unbiased manner. While valuations might look stretched from the short-term perspective, if we take a long-term view, investors could still earn adequate returns from their investments in the Indian growth story.

     

     

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