10700 and still counting .....

The SENSEX continues its upward journey in the process proving all the detractors wrong once again. The market has posted a record gain of 74% in FY06 and some sectors indeed look a tad expensive at the moment. However the buoyant mood in the economy continues and corporate results continue to show robust growth in profits.

Is a correction overdue ?

Although the markets has continues to defy all thoughts of a correction still a correction now seems overdue. It’s a sign of a healthy market and a sudden spike would always be followed by a period of decline. The sensex completed the last 1600 run in record time thus it is likely to shed a few hundred points. However a correction would in no way indicate the onset of a bear market. India would continue to remain in the bull phase for some time to go. So a slight correction – yes ; end of the bull run – NO.

What Fuels the Growth –

The Indian economy is going through a period of rapid growth, economists say such a growth phase typically lasts between 15 to 20 yrs. India is only into the third year of the boom phase, so still some time to go. Sales and profit growth is robust, market demand is growing and incomes levels are on the rise, you don’t have to go far to witness these trends. A visit to the neighborhood market is enough to indicate the optimism. A look at the placement data for business schools and engineering collages indicates a huge upsurge in the demand for talent, starting salaries are also touching all time highs. So what does it mean for the markets, well more money in the hand of the consumers means more demand , higher sales and higher profits. So sector to watch out for – Lifestyle Products and Retail.

A look at the FII and domestic MF inflows indicates the continued confidence in the Indian economy.

INR bn.
FY04 FY05 FY06
FII 388 493 173
MF (9) 128 26

What to watch out for –

Logistics the next big thing.

Logistics sector is the backbone of any economy and the rising manufacturing and service sector along with robust export- import growth opens new opportunities for the sector. Rising port activity and freight and cargo demand indicates the rising growth in the logistics sector. The growth of information technology has opened newer opportunities for logistics companies to integrate themselves more firmly into the supply chain. ( If you have read “The World is Flat” and the chapter on UPS in the book you would be able to better appreciate the point I am making).

The Indian logistics industry is taking the shaped of an organized sector pretty swiftly with a few leading players developing a national foot print and expanding the service offerings.

Retail

As I said earlier a high disposable income and rising salary levels result directly into bigger spending on lifestyle products. Organised retail is just making its presence felt in the Indian market. The share of organized sector in the retail market is still a dismal 3%. So you can estimate for yourself how much growth can be seen in this segment in the years to come.

Capital Goods and Construction

After a few years of caution the manufacturing sector has been witnessing expansion of existing capacity and fresh investment in green field projects. The credit off take from banks and a host of IPOs have provided enough cash to fund the expansion projects. Its definitely good times ahead for the capital goods sector.
Infrastructure seems to be another big mover with the benefits of mega infrastructure projects like the golden quadrangular clearly visible and successful public private partnerships in the infrastructure sector this sector is bound to grow at a fast pace.

What are the risks ?

The two factors that could play spoilsport are hardening interest rates and rising prices of crude. An increase in credit offtake has resulted in banks increasing the landing rates for the personal loans segment (home loans, car loans, education loans et all).
Crude prices on the other hand have risen above $67 per barrel on the back of lower inventory and supply side constraints.
Both the above could put pressure on the so far stable inflation rates and prove serious dampeners to the market sentiment.

Is the market overprices ?

Well lets put it this way- The market is no longer cheap. Valuations are comparable to other developing markets and the huge valuation arbitrage is no more there. Prices for most of the stocks seem to have already factored in the FY07 and in some cases even FY08 expected earnings. So don’t expect another year of 75% growth. However the positive move in the markets still remains intact and the market would continue to be amongst the better avenues to invest.

The next big event ?

The financial year has ended and earning season is here. The coming weeks would see corporates announcing their financial performance for the year gone by. Results being above or below street expectations could lead to a rerating for quite a few sectors. It would also provide further evidence of the continuing growth story.


So in conclusion the optimism continues and its unlikely that the earning numbers would disappoint anyone. The markets seem to be strong and showing no signs of fatigue. However a correction cannot be ruled out.