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BUSINESS STANDARD
Last Updated : Jan 28 2013 | 1:08 AM IST

While current valuations merit long-term value investing, political bickering is dampening sentiment

By George! The defence minister of the country is perceived as one of the biggest threats to the markets today. At least, that's what most market participants that the Smart Investor team spoke to, felt anyway.

The disinvestment process, which, according to the investment community, -- considered as one of the single-most important factors to have helped inject some cheer into the markets --has been thrown into disarray, thanks to the stand taken by the defence minister, George Fernandes.

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No doubt, the intervention of the prime minister, along with support from the disinvestment minister Arun Shourie and BJP head honchos did help ease the tension that arose over the disinvestment of two oil majors, Hindustan Petroleum Corporation and Bharat Petroleum Corporation.

All the same, all eyes are now on the impending meeting of the cabinet committee on disinvestment (CCD), to be held at the weekend (September 7). Indeed, the direction which the entire privatisation programme will take, will depend largely on the outcome of this meeting.

Most market-watchers say that, while a positive decision on the disinvestment of the oil companies can do wonders in reviving market sentiment, anything to the contrary would cast a pall of gloom over the market.

Notwithstanding the shape the disinvestment process will take in the near term, most believe that the overall direction is already set, and that things should turn out in favour of the market over the long haul. Still, it's not all hunky-dory as far as the equity markets are concerned. While there are enough factors to drive sentiment in the long term, there are also many factors that threaten to block valuations from improving. We present a SWOT analysis for the market.

To begin with, we give you some of the strengths that are expected to hold the market in good stead over the long term. The valuation of the market, on a fundamental basis, seems extremely attractive for the long-term investor.

Consider this: the Sensex's dividend yield is ruling at a 10-year high, at more than 2.5 per cent, indicating how undervalued Indian equities really are. While prices of Sensex stocks have crashed, dividends have risen, pushing up the overall dividend yield. Obviously, most market participants believe that valuations, at the current level, are unsustainable and can only improve in the long term.

Also, given that the interest rate scenario is softening, more people are expected to look at the equity markets with interest. At a trailing P/E of 13 for the Sensex, the earnings yield works out to 7.69 per cent. On a forward basis, it obviously ought to be higher. In contrast, the yield on five-year government paper is 6.39 per cent. Clearly, returns from equities seem relatively better.

There is also a tremendous amount of liquidity in the system, much of which, is expected to come into the equity markets, once there are clear signs of a recovery. The economy is recovering, even as corporate performance improves on the back of cost-efficiencies and restructuring initiatives.

In the first quarter of the current fiscal, India Inc registered a 11 per cent rise in sales, while net profits surged by 37 per cent. An almost six cent reduction in interest costs have helped improve operating margins by 69 basis points to 15.5 per cent, on a year-on-year basis.

The new issue market is showing gradual signs of picking up too. Initial public offers (IPOs) worth nearly Rs 30,000 crore are expected to be launched in the current fiscal itself. This compares extremely well against the Rs 1,082 crore raised in 2001-02. (In fact, the highest amount ever raised in a year was Rs 9,919 crore in 1994-95.) Besides, the flurry of open offers and buybacks have resulted in paper getting sucked out of the market. In the bargain, people have made money by offering shares. Market observers believe that, sooner or later, this money will find its way back into the equity markets.

Although the disinvestment process is facing some hurdles right now, it's unlikely the government will completely back-track on the process. If not the oil majors, at least other public-sector disinvestments will take place eventually.

Apart from the dismantling of the administered pricing mechanism, various other reforms in core sectors such as infrastructure, power and telecom are underway. Bit by bit, all the steps initiated as part of the reforms package are adding up. Moreover, border hostilities have reduced.

Having looked at some of the positives, here are a few negatives that could mar sentiment:

The government continues to drag its feet on the privatisation process. With several constituents of the ruling alliance as well as BJP ministers upping the ante on the privatisation process, there are apprehensions that the speed of divestments could slow down dramatically.

The liquidity in the equity markets continue to be low. And there are few big buyers in the market other than LIC. Worse still, UTI continues to be on the sellers side.

The lack of long-term inflows into the equities market continues to be a structural problem. Meanwhile, there seems to be a lack of political will in taking the reforms process forward.

Besides, world markets have exposed a soft underbelly. Their current weakness can have a cascading effect, hurting other developing economies including India.

Some other factors that can be used as reasons to lift the market higher include an increase in the outsourcing business, in the technology and pharmaceutical sectors alike. There are faint signs of revival in some core sectors such as steel and textiles.

Moreover, although the pressure on margins in the technology sector has been factored in, volumes are expected to continue growing, and this should get factored into stock prices gradually.

Factors that threaten to prick sentiment include the precarious political situation. Considering that elections in strife-torn Kashmir are just around the corner, any escalation in border conflict can inflict severe damage on investor confidence. As far as external factors are concerned, world markets will play a leading role. There are indications that the US could be headed into a "double-dip" recession.

Which is why the global economy is not expected to recover at a rapid pace. Moreover, redemption pressure from US funds could weigh on Indian markets. And encourage other foreign funds to keep away as well.


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First Published: Sep 09 2002 | 12:00 AM IST

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