You are still not late to the party

Don't expect high- voltage reforms like insurance and pension. But the FM will definitely take enabling steps that will facilitate quick decision making

Ever since the government showed the courage to bite the bullet on diesel pricing on the evening of September 13, the markets have not looked back. There is a sea change in investor sentiment. Foreign institutional investors (FIIs) have been as benevolent on the markets as the rain gods, who have done their best to make up for an earlier deficient monsoon. In the past five trading sessions, the Nifty has rocketed to its highest point this year at 5,691, on the back of FIIs pumping in Rs 5,791 crore.

My advice to our investors on the morning of September 14 was to ‘Dive in with your clothes on’. At 5,691, you are still not late to the party. You now have the time to think and carefully build your portfolio, but don’t reduce your exposure to the markets.

How do you justify investing at these levels? The world’s industrial engine of growth, China, is slowing. Europe is in a recession and the US is expected to grow only two per cent this year. We too, are growing at a slower pace and our index of industrial production is in the basement. Purists will tell you that in March 2009, when our markets bottomed out, we were at a TTM (trailing 12 months) PE of 10. Today, taking the price of September 13, we are at a TTM PE of 16.9. A 10 per cent rise in earnings this year will not bring the PE sufficiently down for your historic comfort. You should buy now, as the liquidity deluge will elevate PEs further.

After the ouster of TMC, the government might want to take things slowly and not unnecessarily finger its allies. So, don’t expect high voltage reforms like insurance and pension. But the FM will definitely take enabling steps to facilitate quick decision making in projects and address the issue of mounting debt of state electricity boards (SEBs). We can take the FM on face value when he says we can expect RBI to do more at its October 30 meeting.

But my reason of being gung-ho on the markets is the deadly combination of the Shome Committee recommendations and the sea of liquidity that the world’s central banks will create.

India, with its changed perception, is very sweetly placed to make the best of this evolving scenario. Last time, we missed the bus because of irking policies like GAAR, which has now been addressed by the Shome Committee.

The final recommendations will be submitted by the month-end and an eager FM will ensure quick implementation. When these are implemented, sparks will fly. The markets are likely to see a deluge of domestic inflows. Initial public offerings will get a fillip and investors will come charging in as they will no longer be required to hold stocks for one year for tax-free income. This will help the nation in capital formation. In FY2011-12, the holdings in equity and debentures saw an outflow of 0.7 per cent from financial savings of the household sector. This percentage will be positive this year. To give you a historical perspective, the investment in the segment had accounted for 13.5 per cent of the financial savings in 1993-94.

The changed perception, improved liquidity and favourable tax structures will ensure that dollars flow in. The rupee will appreciate and PEs will rise. The time to uncork the bubbly is coming soon.

The author is head of business, private broking & wealth management, HDFC Securities