ORBIT 5000, TARGET 6500?
Well Nandu,you certainly seem to have won the bragging rights on this one,better back up the truck now, I have.<g>
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OCT 11 - OCT 16 1999
ORBIT 5000, TARGET 6500?
Rajiv Goel (ET-Ig)
THE market has decisively crossed Peak 5000. Will it cross the 6000 mark now, the next target set by marketmen, foreign brokerage houses and Investor?s Guide alike? We firmly believe that in next three to six months, the market will steam ahead of the 6000 level.
Should investors too look forward to a further appreciation?
Well, the answer is aptly summarised by Finance Minister Yashwant Sinha, who in a recent interview, conceded that valuations of Indian stocks are much below the ones at the global level. He firmly felt that stockmarket indices have a long way to go from current levels.
To reinforce the FM?s contention, Indian stocks have a a comfortable Price-Earnings ratio of 17.30. Which is quite below the average Price-Earnings ratio of 35 registered in 1992-93 when the sensex hit the 4000 mark for the first time. With corporate earnings in second quarter of the current fiscal set to reach higher levels, the average Price-Earnings multiple will come down even further.
Indian stocks are quite cheap among their Asian peers and when compared to US stocks, they quote at a fraction of their US counterparts. For example, if one picks up Reliance Industries and compare the global valuation of chemical companies, the Ambani-led behemoth quotes at the lowest PE levels among its global peers. Its PE is one-fifth of the highest-priced stock and one third of the average PE of the global chemical industry.
If say, Foreign Institutional Investors get bullish about the prospects of the chemical industry, they would certainly look at the valuations of Indian companies. They would also definitely prefer to buy Indian stocks which profer higher potential of growth among other companies.
The Next 90 Days:Will The Euphoria Last?
The first 90 days of the newly-sworn in A B Vajpayee Government would surely be its honeymoon period and is going to see the introduction of several pro-reform measures. The pulls and pressures of alliance partners are likely to be less severe in the first few months and might increase later, making it comparatively easier for the government to push through much-needed, but contentious, reforms.
Among the legislations the government intends to give effect to are Insurance Regulatory Authority Bill, Money Laundering Bill, amendment to Companies Act, Securities Contracts Regulations Act, and FEMA among others. Many of these measure are liberal in nature, both for the business and the markets.
The government is also expected to focus on external trade and would pay attention to specific references to intellectual property rights, farm and services sector in the forthcoming WTO ministerial-level talks at Seattle. The Vajpayee Administration is also expected to boost Foreign Direct Investment by allowing 74 per cent equity in cars, auto components, petroleum, bulk grain handling and tourism.
The mid-year review of economy by the government would ensure that fiscal deficit is kept under check. It would also consider ways of resource mobilisation and including bulk sale of select Public Sector Undertakings.
On the corporate front, a recent Reuters Poll has estimated the earnings of top companies could grow by over 25 to 28 per cent. Our estimate of earnings growth is even higher. Thus, measures taken by the government will be supported by the growth in corporate earnings, fuelling investor sentiment.
FII Investments
If mere figures are any indication of growing investor sentiment, last Thursday alone saw net FII investment of Rs 171 crore. Conservative estimates put the net FII buying on Friday at Rs 200 crore. Our feedback from FIIs suggests that funds amounting to Rs 3000 crore are likely to be pumped into the markets. More than 100 FIIs have opened accounts in India in the last few months and many of them are yet to open up their trading accounts.
With the lifting of sanctions, US pension funds and hedge funds are moving into the country as well. A semblance of stability in the government and the pro-reform measures will accelerate the inflows. Inflow of liquidity will ensure improved valuations. We have seen the index moving from 3020 to 5000 level backed by Rs 5000 crore worth of FII investments. With another Rs 3000 crore of FII investments anticipated, there is very little to stop the markets from breaching the 6000-levels pretty soon.
What Can Really Go Wrong?
There is very little that can go wrong for the markets now. Among the negatives are a hike in prices of petroleum products, additional tax to cover up for operations in Kargil and a hike in administered prices of other commodities. The hike in prices petroleum products and in administered prices could result in rising inflation, which is at present, ruling at near all-time lows.
The failure of the government to meet disinvestment targets would also put pressure on fiscal deficit, making it imperative for the government to make it up through other means. And if the onus of the disinvestment programme is thrust upon Indian financial institutions like Unit Trust of India, Life Insurance Corporation and General Insurance Corporation, then they could be seen offloading stocks to fund the disinvestment plans.
A hike in petroleum products is imperative and has been discounted by marketmen. Save for any temporary correction, the markets are unlikely to get jittery about it. Only something which is entirely unexpected can mar the present bullish sentiments.
Conclusion, Or A Note On Market Reforms
The macro-economic recovery is in place. Inflows too have picked up. The only missing piece is market reforms. But most of the capital market reforms are out of the blueprint stage and on the verge of being implemented. And, most of them?including the introduction of futures and derivatives?are likely to be in place by December.
With screen-based trading introduced five years ago and dematerialised trading coming in at the beginning of this year, investors would now be treated to rolling settlements, introduction of futures and derivatives and a daily badla.
On the top of it, securities watchdog. Securities & Exchange Board of India (SEBI) has already announced another set of stocks which would be traded in completely dematerialised mode. This would make all Group A scrips being traded in the dematerialised mode. A large number of B1 group scrips will also get traded in dematerialised mode. This would make trading systems more efficient and transparent, besides meeting the demands of institutional investors.
To end, we would like to remind the investors of another development last Friday, which appears to have gone unnoticed. SEBI has allowed bourses to instal terminals anywhere in the country. Which will only ensure that our markets acquire more depth and participation.
Hail the investor! Hail the market! |
