The Hindu Business Line : Sustained interest among global investors likely

DOMESTIC markets scaled new heights during the year helped by a lot of positive news on the corporate and economic fronts. More important, FII flows continued at a robust pace, lending support to the bourses, as reflected in the fact that India has witnessed inflows of around $7.8 billion in 2005 already (about 91 per cent of the 2004 figure).

Going ahead, we believe that continued economic growth and its impact on Corporate India along with sustained interest among global investors and increased domestic flows may be the positive triggers. There are pockets of over-valuation, where stocks have run ahead of their fundamentals, especially in the mid- and small-cap segments.

Overall, we are optimistic about the direction of the markets over the medium to long term. Economic growth is expected to improve demand for goods and services across sectors and this should lead to better profit growth for the corporate sector.

Global investors are positive on emerging markets, in general, and India, in particular, given the expected superior growth of these economies vis-à-vis the developed economies over the next few decades. This, combined with an increase in domestic inflows, should help the equity market.

However, higher oil prices can impact growth if they persist at high levels for a prolonged period.

The near-term dampeners could be the decline in commodity prices, fiscal deficit and impact of rising US rates on global liquidity.

One should not expect the same level of returns over the short term and should rather focus on long-term growth.

Civil Disobedience: One of the most important events last month was the galvanisation of the middle-class in Delhi against a perceived irrational policy on power pricing, and the Government actually had to rescind the order.

Almost a decade earlier, the Maharashtra Government had bound itself in the Enron contract and later had to cancel the same as pricing was untenable.

An important lesson is that many of these contracts will now have to be put up in the public domain — and civil society would do well to judge them on long-term merits — after all, it is their future that the governments are pledging.

From the capital market perspective, does this indicate that the much expected producer surplus would ultimately have to give way to consumer surplus — and, therefore, the current perceived profiteering is not sustainable over the long term?

The government has done well to open up many sectors to competition. However, in the area of property rights, things need to improve.

The rules must be framed in advance to ensure transparency in the sector, which will be helpful in creating a developed real estate market in India.

This is important as liquidity — trapped by the absence of true capital account convertibility — would ultimately move to the real estate market, where pricing would become driven predominantly by liquidity rather than economic fundamentals — perhaps even more so than the current stock market rally.

(Edited extracts from the latest performance reports of Franklin Templeton Investments.)

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