• JUNE 2, 2004

Back to square one

It wouldn't be incorrect to say that the Indian equity markets have been behaving rather volatile in recent times. But then, it is not just the Indian stock markets that have shown this kind of behaviour. In fact, stock markets all over the world have been exhibiting weakness during the last one-month owing to a plethora of concerns that have suddenly taken control of the investors' nerves. And the key markets to take a hit owing to this sudden change in investor sentiments have been the Asian indices.

 April 30, 2004June 1, 2004% change
Sensex5,655 4,835 -14.5%
Indonesia 783 731 -6.7%
Korea 863 816 -5.5%
Malaysia 838 812 -3.1%
Singapore 1,842 1,792 -2.7%
Taiwan 6,118 5,986 -2.2%
FTSE4,490 4,423 -1.5%
China 1,596 1,580 -1.0%
Dow Jones 10,226 10,203 -0.2%
Hong Kong 11,943 12,106 1.4%

As can be seen in the table above, all the major emerging market indices (barring that of Hong Kong), and also the developed markets, are currently trading lower than what they were a month ago. However, it must be noted here that all these indices have actually managed to recoup their lost ground, as all of these, a few trading sessions back, were trading lower by over 8% each (including Hong Kong). Just to list down the reasons (about which, much has already been written and read) that had led to the sell-off in these markets (including India), include the fears with respect to rising interest rates in the US on the worlds largest economy, the repercussions of the Chinese slowdown on the Asian economies and the prospects of a slowdown of global economies owing to rising oil prices. These three primarily, not to forget the threat from terrorism, have forced investors to shy away from equities, which in itself is a risky asset class. But then, higher the risk, higher the return!

While the global equity markets have managed some sort of a recovery over the last few trading sessions, the Indian stock markets continue to languish at lower levels, down almost 15% than a month ago. While all of the above reasons have also played their part in pulling down Indian indices, the biggest cause of the Indian stock markets under performing has been the additional uncertainty that has crept into the Indian growth story owing to the change in the political scene in the country, which has cast some doubt in the minds of investors (both domestic and international) about the continuation of the 'previous' economic policies and the ideology of certain parties, which are now partners of the incumbent government.

At the current juncture, while we do share the view that the noises emanating from the coalition parties pertaining to sectors like banking, power, energy, telecom, etc. are a deterrent to investment flows into equity markets, at the same time, we must re-iterate that a definitive view should be arrived at only after the Budget is presented in early July. We continue to believe that the India growth story is very much intact, though the GDP growth rate is likely to be muted compared to FY04, owing to existing constraints (like productivity) on the agriculture front. This is because agriculture continues to be the prime driver for India's economic growth (the four years prior to last year are a testimony to the same when the monsoons failed), as 70% of India's population continues to depend on this segment of the economy for their survival, and the good news is that the Indian Meteorological Department has forecasted a normal monsoon for FY05.

Investors must note that apart from the sectors (mentioned above), which have been clouded under uncertainty, there are others like pharma, auto & auto-ancillary, cement, hotels & tourism and software, which have, as yet, been off the radar of the coalition attack. In fact there could be opportunities in sectors like FMCG and fertilizers, as special emphasis is being laid on improvement in infrastructure, irrigation and rural India.

Another point in favour of Indian stock markets is that they continue to remain one of the most attractive investment destinations when compared to other emerging markets (barring a couple like Korea and Brazil). Infact, with index valuations close to 11x FY05 earnings, it wouldn't be completely wrong to say that we are "back to square one" i.e. valuations are almost similar to that prevailing at the beginning of the bull run last year.

To conclude, investors must take a longer-term view of the Indian markets and must note that with fundamentals of the Indian economy still strong, the current weakness, once again, provides the investor an opportunity to build his portfolio. We leave you here with what Mr. Ajit Dayal, the co-founder and Chairman of Quantum Information Services Ltd. that owns equitymaster.com and personalfn.com, had said at the start of 2004 and now. At the start of 2004, when the whole world was gung-ho about equities, Mr. Ajit Dayal said, "Don't buy in January 2004. Wait. "There will be another buying opportunity..." and now, when everybody is pessimistic about equities, he says, "The buying opportunity has begun..." .

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