Digging for growth

SMARTSHARE

Most of the major investment houses release their advisories of the year in the month of January. While this doesn't make sense in terms of the Indian fiscal year, it does make sense in terms of marque clients such as FIIs whose accounting periods do coincide with the calendar.

There is a common thread of optimism running through most of the 2006 advisories. If one could paraphrase the old phrase everyone seems to believe that "growth will conquer all". One wonders if that confidence in growth is somewhat misplaced?

Yes, most analysts concede there will probably be a dip in earnings growth rates, interest rates will probably climb, fuel prices will stay high. But growth has been so strong, most people seem to expect the market keep climbing anyhow. At least, that is the official line.

In private, if you talk to the guys who wrote the reports, you get far more nuanced responses. It's infra dig for analysts to say that the market could be set for a major correction.

But few people in the financial sector would be surprised if that does happen. This odd admixture of public confidence and private concern makes it very difficult to judge the actual mood of the market.

The conservatives (or pessimists, if you can call them that) have talked in terms of "bottom-up" investments and said that there might be a "PE re-rating". That means specific stocks could go up, while the market as a whole moves down.

There is at least one advisory, which suggests that political exigencies could lead to a market peak in the first quarter of 2006-07. After that, compulsions related to elections in West Bengal and Kerala could pull things down.

Personally I am becoming more pessimistic about 2006-07 for a variety of reasons. Apart from higher interest rates and higher fuel prices, which will simply have to be coped with by everybody, a dhobi-list of unresolved policy issues could derail optimistic projections and undercut growth.

The power sector continues to bleed and that is the cancer at the heart of India's public finances. It's politically impossible to clean up quickly. No hard decisions have been taken on the issue of retail fuel pricing and that's another huge stress-point.

Infrastructure development has slowed: the Delhi-Mumbai airport imbroglio is the most egregious example; but the spectrum allocation row will hamper smooth growth in telecom services. Even the pace of road-building dropped in 2005-06. Put it all together and growth bottlenecks in the coming fiscal seem likely.

From the bottom-up perspective, a few large stocks seem to be common to most advisories. Most people like power equipment manufacturers, like ABB or BHEL or Suzlon Energy, cement shares such as Grasim or Gujarat Ambuja are being highly touted, as is Bharti Televentures.

Everybody has also made apparently random picks from the wide universe of PSU banks. Most recommendations come with an attached warning of a high probability of "negative surprises".

Some contrarians are also examining PUS refiners on the basis that there could be a turnaround in these stocks if retail prices are hiked in line with global rates.

We haven't understood the dimensions of the IPO scam yet. Traditionally, an Indian bull-market usually ends with the unearthing of a scam. This could be the one that puts a brake on the 2003-2006 run. It doesn't matter if investors prefer bottom-up or top-down models "" if they're running scared, they won't be investing.