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Monday, May 31, 2004

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A good opportunity for investors

Gul Teckchandani

The UPA, in my opinion, will follow reformist policies. Bluntly stated, it does not have much of choice in this regard. This fact will slowly sink into the markets.

THE stock markets went through significant and unprecedented turbulence since the United Progressive Alliance (UPA) Government took over and are just about now inching back to normalcy. Questions are being raised about the stability of the Government and its programme insofar as reforms are concerned.

The market participants are also nervous about the view that foreign investors are likely to drop India as an investment destination and the impact if FII money were pulled out of the markets.

I have briefly tried to address these concerns as scientifically as I can below.

The Congress-led alliance is in place with Dr Manmohan Singh, the original reformer leading the country as Prime Minister and Mr Chidambaram, the man who pushed forward for all market friendly practices in the United Front government, as the Finance Minister.

Yes, there is Left supporting from outside the government but they are not necessarily negative all the time. That there will be pulls and pressures from their allies is a given reality of coalition politics. The reforms are here to stay and each successive government has embraced them whatever be its ideology. The nation's balance-sheet does demand that the government play the role of facilitator. If the fiscal deficit has to be brought down, there is no other way but to pursue reforms in all spheres of activity.

The UPA, in my opinion, will follow reformist policies. Bluntly stated, it does not have much of choice in this regard. This fact will slowly sink into the markets.

The market will now look towards analysing the CMP (common minimum programme) and also wait for the Budget to be formulated by the UPA.

The early onset of monsoon and prediction of a normal monsoon would augur well for the economy to maintain its high growth trajectory during the next four to six quarters. The mood has also become sober in the financial markets and the general opinion is that the stock markets are likely to go down first before they move up.

This mood actually presents a good opportunity for investors. The stock prices have surely moved down but the fundamentals have just about remained the same before and after the election except for a minor shift in policy statement announced by the new government.

The other fear that has gripped the market is that foreign institutors investors ( FIIs) would exit en-masse. Such an eventuality is always a possibility but not a probability. The current meltdown in the emerging market is predicated on the back of the possibility of slowdown in China. The Chinese government desires to cool down on overheated economy, which has been growing at a scorching pace over the last 20 years. According to Citigroup Research, the growth rate of 9 per cent is likely to continue and may not slow down significantly and hence these fears are not well founded.

Further, the markets all over the world have corrected significantly since this murmur surfaced and gathered momentum.

The other uncertainty gripping the global markets is a rise in interest rates in US. That the rates there have been at a historic low and growth has been witnessed in the US and job recovery is also seen, the Fed would not like inflation to rear its head and may have to resort to a little increase in interest rates over the next few quarters is nothing to get overtly nervous about. Though markets all over the world move up based on growth in the economy, a higher interest rate does impact corporate profitability. Coming back to the Indian markets, as we integrate with the world, it is only natural that ripples will be witnessed in our markets on events occurring elsewhere in the world. But then the world will never be perfect and the investor will have some uncertainty or other to deal with at any given point of time.

The current environment in our markets is nearly as conducive as it can get. The upside opportunity is higher that the downside risk for an as astute and sophisticated investor. That volatility is here to stay should now be an accepted reality and be used by investors as an opportunity.

The author is Chief Investment Officer, Sun F&C Asset Management Company.

The views expressed here are his own and not necessarily those of his firm.

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