Sunday, July 20

Equity Markets - The Road Ahead

Hi guys,
This saturday (19th July '08), I attended the All India Conference on Capital markets organised by the ICAI at the Taj Bengal, Kolkata where dignatories of the Capital markets arrived and presentade their views on the markets and the road ahead.

I was pleasantly surprised to note that almost all the speakers (trust me, they are the big shots in the industry) are positive on the marekets ahead.
I am keen to highlight some of the points Mr Nilesh Shah (Deputy Managing Director, ICICI Prudential AMC, managing close to US$14bn, a CA Gold Medalist and a Cost accountant) came up wth.

What went wrong with the markets?
  • High Oil Price (India has the highest Oil import to GDP ratio)
  • Higher Trade Deficit (weaker Rupee)
  • Higher Inflation (backed by higher subsidy burden)
  • High Fiscal Deficit
  • High Interest rate
  • Slowing Growth
  • Traders are short and investors are sitting on cash
  • Rising oil prices (India currently pays $50bn for oil annually)
Clearly nothing has been going good for the economy and consequently the capital Markets. But wait a minute. Who said? Lets have a look at the positives Mr Shah pointed out.
  • Monsoon has been good (June has been good, July has been a bit shaky in some parts of the country but still decent enough)
  • Nuclear deal may materialise.
  • Government is like to continue (winning the trust vote on the 22nd)
  • Advance tax for 1Q09 are encouraging
  • Valuations are attractive (though may get cheaper)
  • India's FY08 ROE is about 25% which is the highest in Asia.
  • Currently there is a negative correlation between oil and the capital markets but historically between Jan 2003 to December 2007, we saw a positive correlation between oil and the Nifty. So even if the oil continues to rise history says we may still see the capital markets going up. Though there are signals of oil prices coming down.
Mr Shah also pointed out some of the very interesting issues that can be done for the economy.
REFORMS is the key word.
Get FDI attention
POSCO and Mittals are keen on getting in the markets and set up huge projects but are stuck since long. Japan is waiting to get approvals to make a rail frieght corridor between kolkata, Delhi and Bangalore, a deal worth $80bn.
Liberalise ECB guidelines
Allow Foreign Exchange to enter into the country, create capacity and infrastructure
Appreciate Rupee and control imported inflation
[please refer to my previous post where I have talked about the implications of artificially appreciating rupee ]
Execute - Increase supply, Increase export..... these will expand the GDP, maintain growth and bring down the inflationary expectations.
Mr Shah (and others) was positive on successfully fighting the oil crisis just the way we fought the Food Crisis in 70's and Foreign Exchange Crisis in the 90's.

He also mentioned a very interesting point that in 2009-10, Indian GDP can go up by about 1.5% with just 3 projects that are being executed.
Reliance Jamnagar project that is expected to add about $4-5 bn to the economy
Cairn India Oil Exploration project in Rajasthan
Reliance Gas Production at the KG basin that is expected to generate $25bn if the expectations meet (lets take it to $10 bn even if we consider Mr Ambani very optimistic at $25bn).

If India's GDP can go up by 1.5% by just 3 projects, there are projects worth $700bn in the pipeline. IMAGINE THE FUTURE AND POTENTIAL OF INDIAN GROWTH.

As a suggestions for the capital markets, he suggested to BUY AT EVERY DIP in the markets. the Valuations are Fair at 11x 1 Yr forward earnings.

He concluded being OPTIMISTIC ABOUT INDIA.

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