The Hindu Business Line : `Stay invested'

IS the Indian equity market fully valued? Is it only somewhat more reasonably valued than before? Or are we nowhere near the peak as yet? Questions such as these have been the talking points in investment circles for some time now, especially since the indices have come within kissing distances of magic figures.

Fund managers report that they are being asked these questions every now and then, especially by investors who wish to know whether they should book profits or stay put for some more time.

While no fund house would really want investors to pull out in bulk (because that would mean a sudden depletion in their asset base), there is a strong opinion in favour of continuity. Roughly translated, this can be put in single sentence: Remain invested. In fact, fund managers would like you to invest systematically and also actually bring in fresh money every time the market falls.

The negatives: This nevertheless is the time to look beyond the gains recorded in the past year and warm up to the `threats' that the India story seems to face at the moment. (For the record, India was among the top emerging markets in 2005. A number of sectors did remarkably well throughout the year even as overseas investors continued to pour money into the country).

In other words, there is need to stay vigilant when it comes to oil prices, which may well play the spoiler in the New Year. Political developments too can make or mar sentiments - do not forget there will be elections soon in some states.

Also, India's fiscal deficit cannot be wished away and there are concerns over interest rates and inflation. As for liquidity, there are critical issues that stem from demand for credit.

The Sensex, fund managers point out, is currently trading at a one-year forward price-earning multiple of 16. And this is a high of sorts.

At another level, there is earnings growth all right, but such growth may not be sustained for long on a quarter-to-quarter basis.

A marked slowdown on this front will hurt whatever positive sentiments that have come into play. At the end there may not be too many questions about the longer-term outlook of the Indian market, but investors should stay prepared for short-term corrections.

Glut of NFOs: In the midst of all this are new equity funds - funds that are raising money now through NFOs. The last time we checked, at least half a dozen offerings were in the market together, trying to tap all sorts of distributors. And even as we write this, a few more are said to be waiting in the wings, awaiting SEBI's approval. February will again be a busy month for marketing executives working for many fund houses.

For the latest entrants, it will not be quite easy to allocate the newly-mobilised assets on the basis of absolute valuations.

The need of the hour is a set of good stock-specific strategies, ones that will remain relevant in the context of medium- to long-term sustainability.

Fund managers must also remember that investors (after seeing the smart returns they got in 2005) will want more in the coming season as well.

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

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