THE sharp run-up in the market post the new government has made investors, especially retail investors, a bit cautious. The bitter taste of the recent past is not going easily and most retail investors seem to have missed the bus as they still find it hard to believe in the likely turnaround of the Indian economy. The rally has, therefore, been mainly triggered and carried by FIIs’ belief in the Indian economy and the massive amount of cheap money flowing in due to the comparative attractiveness of India vis-a-vis other emerging economies. Indian investors with a cost of capital of around 10 per cent still do not find the market worth investing in.
I am personally impressed with the initial moves made by the Prime Minister and his team that give enough hints of what lies in store. The government is taking active steps to do away with unnecessary legislation and procedures to make matters simple not only for the common man but for those who wish to set up and expand business. By the time this issue of gfileswill be in your hands, the Finance Minister would have presented the Union Budget for the year 2014-15—expectations of which are already very high.
But I believe the budget should be seen by the market as just one of the facets of the entire policy framework. If one is to believe the PM’s words that he would like to take all the unpopular measures and if recent announcements such as the hike in rail fares are any indicator, the FM is likely to bite the bullet on many contentious issues facing the economy. I expect the FM to announce constructive measures that can facilitate manufacturing and consumption growth and at the same time keep inflation under check. Another important thing expected of the FM is to lay down the path for the next five years so that the uncertainty surrounding each budget is reduced and important reforms such as DTC and GST can be put on the fast track.
In the meanwhile, the global scenario has become more volatile due to the developments in Iraq. Global crude oil prices have spiked to a nine-month high. India happens to face maximum risk from any probable oil crisis due to its very high oil intensity, i.e. it needs more oil to produce the same economic output as compared to its peers mainly due to inefficient usage prompted by poor policies. Oil imports account for 80 per cent of our energy imports but cater to only one-third of energy demand.
The key economic indicators in the US and the UK have not been very encouraging, increasing the global risks of a faster recovery. Global risks coupled with deficient monsoons leading to heightened inflationary risks and widening current account deficit may effectively derail the early signs of recovery. This will only put pressure on valuations in the market. But most bull runs ride the wall of such worries. Investors need to be cautious but can still retain their optimism. The best way to handle a situation like this is to invest in small tranches over a period of time.
Vol. 8, issue 4 | JULY | 2014