The Hindu Business Line : `Consumption, infrastructure will be driving factors'

If you have read some of the recent fact sheets, especially the little notes that most fund houses routinely provide as preface, you will without doubt end up with the feeling that these have a lot of things in common.

We have tried to sift through what many of our fund managers have lately written, an exercise that has helped us arrive at a few sharp conclusions.

These should help investors form an idea about the state of the markets and the way things are likely to shape up in the days ahead.

The Indian economy, as some players put it expressly, is set to clock a growth of about 8.5 per cent in fiscal 2007, principally because of steady progress in services and industry. And with this as the backdrop, India will continue to rank among the fastest-growing economies, a trend that will be reflected in corporate performance.

Now, as everyone knows, corporate performance - and this has been true for quite a few quarters - has not really been a cause for concern. Earnings have grown and most people expect earnings to grow steadily from here. This, in fact, will be a dominant theme during the year.

Many fund houses, however, believe that the domestic market is well into the `fair value zone' (as one of them put it). While valuations do seem to be stretched in the short term, the market is generally expected to deliver substantial value when long-term investments are considered.

Major Risks

What are the risks that Indian funds face? As for the key risk, the answer comes pat: inflation. Some of the other major risks will stem from serious volatility weighing on equities, capacity constraints, inadequate spending on infrastructure, inability of the Government to take up harsh reform measures, issues concerning the flow of liquidity into the country from abroad... the list is long.

Overall sentiments, fund managers have pointed out, are not quite bad. In fact, some of them explicitly suggest that India will continue to be led by two dominant themes - consumption and infrastructure. A few actually add that even an interest rate rise may not have a critically adverse impact as in the recent past.

Stock selection

At another level, there is serious consensus that the going will become further stock-specific. As a well-known fund house mentions, higher returns will be generated by better stock-picking and timely execution. It is also mentioned that the recent step-up in lending rates by banks could start to reflect on corporate balance sheets, especially those of small- and mid-cap companies. This also underlines the significance of stock selection.

To push the point further, the same fund house says: "The market continues to be at reasonable valuation given the growth opportunity and we believe it may continue to trade at higher multiples compared to peers in the emerging market space. How high valuations can go from here would depend on the equity risk premium that participants would want to give and this needless to say is now influenced more by global factors."

Feedback may be sent to nilanjan@thehindu.co.in

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