There's no end in sight to this party

PARTY AT THE BOURSES

Inflation, infrastructure could play spoilsport.

Building on a strong 2004, market entities look forward to a rocking 2005. On the plus side are a ticking consumption cycle "" implying volumes will grow "" an appreciating rupee and an upturn in companies' investment cycle.

But markets will also keep a close eye on domestic inflation, particularly in energy prices, signs of disequilibrium in commodity prices and emergence of bottlenecks in infrastructure.

Above all, brokers said they would be watching China's macro numbers as sharply as Indian numbers. "A slowdown in the Chinese economy may benefit some Indian companies and perhaps hurt some. We go into 2005 with the hope that we attract more investments in 2005 than China and other emerging markets."

Nandan Chakraborty, head of research at Enam Securities, said: "There are some strong reasons for the markets to strengthen further. Valuations are reasonable and technical factors do not imply over-bought markets. Investment and consumption-led volume growth in domestic markets, an appreciating rupee and falling import tariffs are leading to lower industry costs and inflationary pressures. We expect the markets to remain flooded with liquidity. Overall, all factors point to a very good 2005.

Ajay Sondhi, vice-chairman and managing director, Kotak Investment Banking, said: "The year 2005 opens with the strongest equity issuance pipeline in recent memory, with a number of high quality IPOs as well as ADRs planned for the first half. Continuing strong foreign institutional investment inflows and the buoyant market outlook present a conducive issuance climate, and it is quite possible that 2005 may even top 2004 levels.

The new regime for the textiles and pharmaceutical industries, and the continued growth and global leadership of Indian IT and business process outsourcing companies are some of the key drivers for 2005.

The anticipated amendment to Press Note 18, and the raising of foreign investment caps in the civil aviation, insurance, banking and telecom sectors are some of the other catalysts that could make 2005 a record year for investment banking."

AK Sridhar, chief investment officer, UTI Mutual Fund, said: "In 2005, the investor must take a relook at debt as it can give good returns from here on, better than the one-year bank deposit rate. Though the equity market is at a historic high, one can expect equity to give at least 2-3 times the return that one gets from debt. So one must look at spreading the investments."

According to Sridhar, the core/basic industries have the potential for an upside. Sectors like steel, cement, power and engineering look good. The pharmaceutical sector is also looking good for a 1-2 year investment horizon. The mutual fund route is a good investment route at these high levels.

KN Sivasubramaniam, senior portfolio manager, Franklin Templeton Investments, said: "We expect the Indian economy to exhibit good growth in 2005, barring any unforeseen circumstances such as a sharp spike in global crude oil prices and a bad monsoon. We expect key growth drivers such as retail lending, positive demographics and outsourcing to continue. In addition, we see accelerated infrastructure and manufacturing spending in the coming year."

On the interest rates front, domestic rate movements would be dependent on fundamentals such as inflation and liquidity along with factors such as oil and commodity prices and rupee appreciation, Sivasubramaniam added.

While manufacturing inflation has started to move up, the rise may be muted, given the higher base. India has been traditionally a stock picker's market, but the strong macro story in 2003 led to a prevalence of a top-down approach.

Long-term investors are better off adopting a bottom-up approach and invest in companies with good fundamentals across sectors. There are opportunities across sectors and picking up the right stocks will be more important rather than identifying the sectors...