• NOVEMBER 23, 2004

6,000: Reason to be bullish?

Amidst all the global developments, much of which are not good news for any stock market across the globe, the Indian bourses have rather quietly (relative to the 2003 bull run) headed northwards, notwithstanding the correction over the last couple of days. In fact, a small faction of the market is already talking about (very much similar to the previous time) the Sensex vaulting the 7,000 levels! In this backdrop, we conducted a poll on our website with the intention of trying to gauge what you, the retail investor, feels about this leg of the rally.

We asked whether at 6,000+ levels there was still a case to invest in equities. The audience feedback is mixed and a tad surprising considering that the indices have gained strongly in the last 2-3 months, that too without any significant positives. A majority (50%) of the audience believes that there is still a case for investing in equities at these levels, while almost a similar proportion (46%) thinks that it would not look to invest in equities. The rest have stayed undecided.

At the Sensex level of 5,400, we had conducted a poll asking our audience their views regarding equities. A majority (48%) had responded by saying that they would hold on to their investments and 25% of them said that they would buy further from the markets. The rest said that they would sell their holdings. The change in investor perception seen during the two Sensex levels of 5,400 and 6,000 indicate that investor perception is subject to sentiment prevailing in the markets.

The point we are trying to highlight here is the fact that, in a bullish environment, it is easy to get carried away by sentiment. From a majority of 75% (who would have either held their investments or sold part of all of it), currently 50% of the audience feels that they could invest further in the stock markets.

So what has led to this change in perception? For one, the overall bullishness being exhibited by the institutional investors (read FIIs) seems to be behind this new found bullishness. Of course, strong economic activity has been a major reason we believe that a considerable part of the activity seen on the bourses is due to sentiment rather than concrete fundamentals.

Considering that interest rates are likely to go up shortly, Indian corporates may be in for difficult times. Also, with very strong competition in almost all the sectors of the economy, corporates may not be in a position to pass on rising input and interest costs to their customers. This could impact their profitability going forward. While Indian companies are banking on high demand growth in the coming years, it is advisable to be cautious considering that India Inc. has faltered (the rush to add capacities between FY95 and FY98 led to a prolonged slowdown due to faulty demand projections) before on this account.

It must be noted that currently, the 'India story' is primarily that of growth and to a very small extent that of value (akin to 2003). Thus, while making fresh investments into equities, one has to keep in mind that the under-valuation in Indian equities no longer exists and hence, the investor must be content with the fact that he may not get the returns that were seen during 2003. On the contrary, if one were to invest in a stock expecting the growth story to pan out, then he would have to keep a long-term perspective in order to garner sufficient returns.

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