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Where are bulls headed?

PTI | By, New Delhi
Jan 07, 2006 02:56 AM IST

Where is the market headed before the budget? January 18 is being cited as a tipping point by many analysts for this is when the special price discovery trading session on Reliance Industries takes place.

Where is the market headed before the budget? January 18 is being cited as a tipping point by many analysts for this is when the special price discovery trading session on Reliance Industries takes place.

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HT Image

India’s trading volume to GDP is just a decade behind the US though per capita GDP is trailing the US by over 70 years.

Morgan Stanley’s Riddham Desai believes that the business of investments is suffering from a high base effect. FII trading volumes hit $115 billion in 2005 and have risen over six-and-a-quarter times over two years. The average market cap in 2005 was $436 billion versus  the current market cap of $525 billion. Equity mutual fund flows are going to end the year at about 70 bps of GDP or over $5 billion.

The average savings into equities over the past five years have been 25 bps of GDP. At the same time, many reckon that liquidity flows at this juncture are not forecastable due to a variety of reasons. A further rise in US Fed rates is one imponderable. But more than that, Japan which has played a key role in pump-priming a part of the Indian spike can turn from source to sink of global funds.

Nandan Chakraborty of Enam Financials feels that recovery in economic growth and asset prices in Japan could play a part in this.

He says, “The Bank of Japan is likely to raise rates by late 2006, though still negative in real terms. The growth in Japan is investment-led and dependent in many ways on China’s growth, consumption growth incipient. Hence long-term sustainability is dependent on productivity gains versus adverse demographics.”

Other analysts maintain that currency is only one factor among many which govern relative liquidity flows. The burgeoning current account deficit is exacerbated by import demand and rising oil prices. However,  there is an interesting  offshoot of the entire spike in asset prices in India. The wealth that Indian households may have accumulated over the last two-and-a-half years could be a staggering sum of money. For the bull orbit is not just limited to equity, people have made a killing in realty and bullion.

Despite continously selling stocks since the middle of 2003, Indian households could have raked in $60 billion as accretion to wealth from capital gains, dividends and stock price appreciation.

Add to this, the increase in gold and property prices. Desai argues, “All told, we may be looking at over $250 billion as wealth creation for households, 30 per cent of India’s estimated GDP in 2005.” It is felt that such wealth creation could be the precursor to a shift in risk appetite away from risk-free assets including government-sponsored small savings to more risky assets such as equities and property. During 2005, this has been thrown into stark relief with equity mutual  fund flows crossing the cumulative flows of the preceding five years.

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