The Indian capital market has entered the phase of sanity which is good for the long term and will lay the foundation for a take off for the stock market. The mutual fund industry, however, remains a cause for concern. With most of the sops gone and the high interest rates, mutual funds are not as attractive as they used to be. The high rate of redemption has taken its toll and until some major changes occur either on the policy front or in the structure of interest rates there isn't much hope, says James Capel B&K in a a research report on 100 top Indian companies.
According to it, this phase of sanity will probably continue for another two years.
The sanity phase which has come to the Indian capital markets after the phase of euphoria, will see investors demanding quality management and profits and undertaking incremental analysis of the capacity expansion being undertaken by companies.
In this phase, investors will be attracted to global depository receipt issues of quality stocks which are sensibly priced thus forcing deferment of glamorous expansion plans of several companies. Capital squeeze will lead to better allocation of resources which will lead to the big getting better, feels James Capel B&K.
The phase of euphoria which gripped the Indian capital markets for the first five years of liberalisation was characterised by hot money chasing stocks for early gains as foreign institutional investors tasted the Indian market for the first time.
Corporates became opportunistic and announced mega expansions and GDRs hit the scene with aggressive pricing and a host of private placements by corporates. Easy money was frittered away into real estate and stock markets by corporates, states James Capel B&K.
This however is a thing of the past. For two years down the line, the sanity phase will make way for the consolidation phase, which will see mergers and acquisitions, prudent capacity expansion by industry, shake out for weaker players, revival of the debt market and domestic mutual funds and the flattening out of interest rates.
This will be followed by the take-off stage, which will be witness to Indian corporates reaping the benefits of prudent capacity expansion, lowering of interest rates, increase in equity investments and hunt for value stocks.
According to James Capel B&K, implementation of a depository and lower long term interest rates are two of the major indicators one has to watch for before the Indian markets can witness a bull run.
Till then we feel that supply will exceed demand and the markets will remain sluggish ""a good opportunity to pick up long term winners, states the report.
As regards liquidity, James Capel B&K observes that on the demand side, foreign institutional investor inflows will continue to form the bulk of investments in the secondary market.
In the tight money supply situation retail investors have become extinct. In any case retail investors as a group are always the last ones to enter, so one cannot look at them for a reversal of trend, states the report.
On the supply side, although the domestic primary market has been sluggish, it is a reflection of demand rather than supply, as the latent supply is very high given the fact that a companies have been forced to defer the public issue plans.
