Market ahead 2008

The Prosperous but volatile fiscal 2007 is passing on the baton to the new fiscal 2008 and it is time to crystal gaze and plan our investments in FY08 for better returns. FY07 has left behind many milestones in the Indian Capital Markets and gave a treat of four prosperous fiscals in succession. Will then, the new fiscal usher further wealth creation or wealth erosion for investors?

Before looking ahead, let us peep through the rear-view mirror for a moment. Earlier, after the prosperous FY03, FY04 was a dream year during which the BSE Sensex had grown from 3049 on 31.3.2003 to 5590 on 31.3.2004. Later, FY05, the Sensex rose from 5590 to 6493. During FY06, the Sensex recorded a growth of 74% to touch 11307. In the outgoing FY07, the Sensex rose to a high of 14724 on 9-2-2007 before retreating to the current level of around 13000. What next? If we look at the apparent and unfolding positive and negative factors, probably the party is still on and the investors can welcome the new fiscal FY08 with reassuring hope. Is it a mere new year wish or a reasoned perception? Let us look in detail.

First, look at the concerns. In the Indian context, bull markets have always been shorter than bear markets, which invariably last longer. Hence, after four prosperous years in succession, the probability of a bearish market ahead is more. India’s fiscal deficit is another area of concern. Prevailing higher crude oil prices do not augur well for the economy. Appreciation of the British Pound and Euro against the Indian Rupee in the last fiscal rings some warning bells. Highly probable are the inflationary pressures that FY08 cannot ignore. Indian stock valuations appear a bit expensive in comparison with those available in other developing nations. Finally, political developments like the Nandigram andSingur agitations do not give out good signals to global investors. Now look at the positive factors-India is the second fastest-growing economy in the world (second only to China). A GDP growth rate of above 9% is achievable over the next few years. Exports growth is really pleasing and global outsourcing only highlights India’s vast untapped potential. A consistent and impressive growth of the Indian Corporate Sector
inspires confidence. The Indian Rupee’s appreciation against the US Dollar in FY07 is very impressive, which augurs well for the increased FIIs inflows. The Indian Rupee has appreciated against the Japanese Yen also over the last one year.Let us not forget that for over a decade boom-conditions prevailed in USA in the Nineties when the US Dollar was the almighty.

Our burgeoning foreign exchange reserves and the government’s commitment to reforms and eagerness to attract foreign investment are big positive factors. Likely revaluation of the Chinese currency by about 10% in FY08 augurs well for the Rupee’s strength. Even on the crude oil front, last year has proved that the impact of high crude oil prices is no longer
alarming in the light of globalisation. Besides, crude prices are likely to soften after a couple of months. Coming to the fiscal deficits, India’s position is far superior to that of the USA.

During 2006, more than $7.09 billion moved out of US equity markets towards emerging markets in spite of federal interest rate hikes to a record 5.25% p.a. Now, US interest rates have peaked and even rate-cuts can be expected in the latter half of 2007. Problems in the financial sector of US economy and its likely slow-down signals further flight of capital from Dollar assets to non-Dollar assets across the globe. Even the Euro zone interest rates do not have far to go.
Although the Japanese economy may be on an upswing, interest rate hike beyond 0.50%p.a is not expected from the Japanese central bank. All these factors favour increased inflows into India in FY08.

Thus the historical perspective of the market is no longer valid. What we have seen in the past 55 years in India may not be relevant for the next few years. In fact, a longer bull phase (of around a decade) that was witnessed in the US in the 1.Nineties and in China in the recent past can be visualized for India in the evolving conditions. Hence the concern of bear market after four consecutive prosperous years need not bother us much. Although inflation is a major concern for India, almost all countries face this threat and we need not be unduly worried over it. Even on the valuations front, comparison with other countries or mere P/E ratios alone will not impact the investors’ fancy. Higher growth of the rates perceived for the Indian corporate sector and the depth of the Indian capital market may compel global investors to continue buying the Indian Growth Story for some more time. Look at some recent media reports: Dubai based Evolence India Holdings recently raised US $65 mn.; India-focused funds; Indian story is
attracting global investors in droves, Apprehensions of FIIs pull out from China sends shock waves throughout the globe. Although the Chinese market recouped the losses, global investments pull out from China cannot be ignored especially in view of the massive inflows it attracted for more than a decade. In fact, such pullouts can benefit the Indian economy even if we can attract a fraction of such outflows. Looking at the sustainable impressive growth of around 9%, the Indian economy will certainly be attractive for global funds.

By this, I do not mean that the road ahead will be smooth and safe. Volatility is to be accepted as a matter of fact when the markets race past to unchartered territories. May-June 2006 movements of the Sensex should serve as a good reminder to investors. The BSE Sensex plunged to a low of 8799 on 14-6-2006 in just about a month from its high of 12671 it scaled
on 12.5.2006. The recovery thereafter was equally striking as the market crossed the 14700 level in February 2007. Such volatility should be utilized to reduce the cost of one’s holdings by selling at higher levels and buying back at lower prices. In fact, we can look forward to the Sensex level of around 16000, if not more, then FY08 can be more eventful than FY07 2008. Cautious and conservative investors can get around 20% returns in the new fiscal. Brave, nimble-footed, studious and aggressive investors can even target dream returns commensurate with the risks they are willing to take.
In the past few fiscals, large cap momentum stocks stole the limelight. However, things are more likely to change in view of the provision for ‘short selling’ permitted along with stock lending in the new fiscal. This move is reportedly is expected to bring about more depth into the markets. However, this will certainly tilt the balance in favour of bear operators especially after 4 prosperous years. In such circumstances, most bull operators are likely to concentrate on
growth stocks from the mid/small cap segments. Hence potential mid/small cap stocks are likely to give superior returns in the new fiscal even though the indices may not record their impressive growth.