Hope…can’t substitute Reason.
As the curtains come down on yet another eventful year in the Indian equity market, I think the time is rightto put down my thoughts. In this commentary, I shall write on the broad factors that influenced marketdirection in 2006. I shall not use too many jargons, as I believe they kill the fun of reading.
(However, in placeswhere I cannot avoid some, explanations follow)
. In connection with this, I shall write on what fuelled the growth instock prices of companies and prices of real estate. I shall also write on the factors that I think keep foreigninvestor interest high on Indian equities.As usual, I shall refrain from making any prediction about market direction or market levels. I believe thatpredicting market direction is far less fruitful than predicting my behavior, simply because I have far morecontrol over the latter.
What happened to the Indian stockmarket in 2006?
1.1: Macro factors strong
The Bull Run that began in 2002-2003 showedno signs of abating in the year gone by. Themacro economic factors strengthened further,propelling India’s GDP (Gross Domestic Product)to an 8.4% growth over 2005.In the latest quarter (Jul-Sep 06) the economygrew a whopping 9.2% over the correspondingperiod last year. Significant contributors to thisgrowth were the Services sector, which grew14% followed by Manufacturing, which posted agrowth of 12%. Agriculture though proved to be alaggard, growing a meager 2% over last year.Some comments are worthy here. Theencouraging trend of the services andmanufacturing sectors showing strong growthindicates several things. The former capturesgrowth in trade, hotels, transport andcommunication. Companies that cater to theseindustries, not surprisingly, made their shareholders very happy.Before this section peters down to a numericalexercise, I shall introduce briefly on theimplications of a growing economy on individualsand companies. This, according to me, is of far more importance than dwelling on numbers. Solet’s dive right in.During an economy’s expansionary phase,interest rates tend to be low, thereby leading toan increase in what experts call, ‘credit offtake’ (a jargon that can be loosely replaced with ‘loans’).The low interest rates imply that individuals likeyou and me can borrow more than we previouslyimagined. This leads to growth in loans, which ispositive for banks and financial institutions. Lowinterest rates also mean that companies canaccess low cost capital for capacity expansion.A growing economy also increases demand for
Economic Data: India (2005)
Population (Billion) 1.1GDP (PPP in $ Trillion) 3.8GDP (Per Capita in $) 3,508GDP Growth Rate (%) 8.4Inflation (Consumer Prices in %) 4.2Exchange Rate (Re/$; average) 44.1