The Hindu Business Line : `Roaring days ahead for equity market'

LAST year Motilal Oswal Securities, among the largest retail brokerages in India, gave a whopping 160 per cent post-tax return to its 50 odd clients in its portfolio management system. The minimum investment in the PMS is Rs 50 lakh, and in April 2004, the firm had 51 clients.

Its CMD, Mr Motilal Oswal, says the Indian equity market has overcome the "shock" of seeing the BJP-led coalition being replaced by a Congress(I)-led regime at the Centre. But with the task of government formation passing off smoothly and Mr P. Chidambaram's appointment as Finance Minister the market has regained confidence. Mr Oswal was among the brokers the FM met in Mumbai during those gloomy days of May 2004. "I found his body language quite positive. He focussed on macro-economics and looked confident, and passed that confidence to the investing community. He is articulate, understands economics and is not new to the market," Mr Oswal. But for the blip on the transaction tax (which was fortunately cut drastically).

"Anyway, for long-term investors, transaction tax is not an issue. With long-term capital gains made zero and short-term gains taxed at only 10 per cent — it is peanuts — long term investors will definitely come into equity. They will pay the turnover tax at the time of entry and then forget about the share for some time."

Had the original tax rates remained, the day traders would have been really hurt. Would he have welcomed the reduction in their numbers? "Not really. Day traders are the life-line of the market because they provide easy entry and exit not only to domestic investors but also the foreign institutional investors. They provide liquidity which lowers the impact cost. In the last couple of years, because of rising volumes, the brokerage, depository and exchange transaction charges have come down dramatically. The FM knows this very well and did not want to kill the golden goose. But if he revises his stand on FDI we could see some kind of selling from the FIIs and domestic players. That is the biggest concern in the market." High oil price and inflation worries apart, says Mr Oswal, the equity market has a lot of positives to look forward to.

"Corporate performance is excellent and we have a stable government in place with visionary people at the helm. On top of that, FII interest is still positive in India." He sees the Indian equity market headed for "roaring times". With inflation nearly 8 per cent and interest rates hovering around 5 per cent, what the investor is seeing is a negative return. "Lower interest rates have compelled investors to look elsewhere for investment instruments... Even the serious fixed-income guys are now looking at equity as a good option. Small investments are coming into equity now from people who have never invested in equity before," he says.

Also, a strong and transparent regulatory system has increased investor confidence in the equity market. "Demat accounts, screen-based trading and information available to investors, including that from corporates which are opening up and sharing information with investors, and research offered by broking firms have further increased investor confidence and removed his earlier suspicions."

Asked to spell out investor psychology Mr Oswal says: "People are looking at equity as a good option even though it is a risky instrument. The post-Maruti IPO period had been a huge positive and people have made money in most of the IPOs that came out in the last few months. The TCS price is attractive, and response to this IPO has been very good. I would say the equity or IPO investors always look at the rear-view mirror. If money has been made in the past... they think that money is going to be made in the future, and on this basis. I see the equity market perking up."

The sectors Mr Oswal recommends include auto — particularly tractors and two wheelers — and banking. "We are positive on the banking sector, including private banks, as this sector has shown 30-40 per cent growth. Engineering, cement and steel, as also telecom appear attractive, with Reliance Infocomm all set to come out with an IPO, that would be worth betting on."

As for the future of the equity market, he sees roaring times ahead. "The money generated in our system is enormous. Where will this money go? The majority of that money continues to go into bank deposits at 5 per cent interest and on that income too you have to pay tax. But now long-term equity investors will not have to pay any tax and there are better returns in equity. Equity as a class has always outperformed other instruments over long term," he adds.

His advice to the small investor: "Find a good broker with research capability and enter equity for long term. Short-term equity can throw up both positive and negative surprises. See the fundamentals of the company, do your home work and do not get carried away by tips or rumours." His top five picks: Hero Honda, M&M, Ipca Laboratories, Birla Corp and Asian Hotels.

(Response may be sent to rasheeda@thehindu.co.in)

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