The Telegraph
Since 1st March, 1999
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Run fast to catch up on lost time

I believe that the capital market is in the early stages of a strong bull run. With the decline in interest rates showing signs of bottoming out, time has come for investors to look at investment options beyond fixed income instruments.

The question is where to invest without losing liquidity and without taking excessive risk. The risk profile of equities took a deep and pretty serious knock after the technology stock bust three years ago.

Since then till a few months back, the equities market meandered a pretty aimless course. Though investors felt that stocks were undervalued, fear and apprehension kept them away from the market. It was difficult to convince most to invest in equities when the BSE sensex was hovering around the 3000-mark though fund managers did their best to dispel fear.

We now see that the stock market has moved up significantly in the last few months, with the sensex nearing the magic 5000-mark. And now the question is being asked whether we should think of changing our asset allocation by shifting a substantial portion to equities.

I believe that we should have looked at this option much before and should have invested according to our risk appetite. Even now it makes much sense to look at equities for two reasons. First, the current index levels are still away from where I see the market at the end of the year and further away from the end-2004 index value. Second, debt funds are likely to offer returns in the region of 7 per cent to 8 per cent in the current environment, unlike the high returns over the last three years.

Why am I bullish' There is a new industrial India, a leaner, meaner one. Economic fundamentals are strong with the expectation that the country will achieve a growth rate of 6.5 per cent during the current financial year. All sectors are performing well and the confidence level is high. I expect a consumption-led economic revival that will create a strong environment for companies focussed on the domestic market.

In addition, the industry has used the last few years to ensure efficiency and product quality. It has also been able to cut costs and manage debt. This allows companies to be globally competitive in select sectors, which was inconceivable even a few years ago. The external accounts are also comfortable and interest rates are at historic lows.

Essentially, the current level of sensex is much more cheaply priced than it was two years ago because interest rates are now less than half and earnings have shown a robust and sustainable growth.

Fundamentals have been positive for some time now but the liquidity was missing to light the flame and then let the fire rage. Foreign institutions saw the opportunity and rightly gauged India’s position in the emerging market, With a unique constellation of high quality sectors and stocks to invest in, the foreign funds have energised domestic liquidity. Let us not look for demons where there may be none.

(The author is president, DSP Merrill Lynch Fund Managers. The views expressed in this article are his own)

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