The Hindu Business Line : Hope of long-term growth may give market a boost

Market may maintain an upward bias this week as a growing number of investment advisors and investors have come to believe that here is an opportunity in the long term, notwithstanding the negative shocks that may be upsetting in the short-to-medium term.

Psychologically, the market has somewhat got over a fear of further dips. If they come, they would not change the broader trend, the general thinking goes. It is difficult to keep the market down for long as it has priced in the economic and political uncertainties that may emerge.

It is a typical behavioural syndrome that surfaces when one ceases to see the glass as half empty.

A large number of market observers have dissected the bear phase that gripped 2008-09 and have come up with forecasts for 2009-10 that the way forward could be a bumpy journey upward. Very few predict that it could be an entirely downhill movement.

This may induce broader investors’ community to drop their risk aversion. The expectation is that the money that is waiting on the sidelines may move in if there are further dips.

Already in many sectors worst-case earnings’ estimates for the fourth quarter have been revised and market prices reflected that through upward corrections in the last few weeks.

Though year-on-year the Sensex stocks are projected to show negative performance in Q4, many think that quarter-on-quarter they may produce positive results. Even sectors like IT, power and FMCG may register 17 per cent to 21 per cent PAT growth y-o-y, some estimates indicate.

For the capital goods sector, the profit growth is likely to be limited on lower operating margins and high interest cost owing to extended working capital cycle in spite of decent top-line growth, previews suggest.

As automakers reported a strong sequential growth despite the slowdown and macroeconomic woes, some analysts are willing to re-rate the prospects of the sector’s stocks. However, despite strong top-line growth possibilities by some of the cement players, analysts believe that operating profit margin would decline on an average 350 basis points.

For the banks, the overall predictions tend to be negative as net interest margins are expected to decline, asset quality is apprehended to deteriorate and treasury income is expected to come down. The NPA level of public sector banks was at 2.4 per cent for most part of 2008, but it shot up to 4.4 per in December.

There is a market consensus that whichever coalition comes to power, public spending and subsidies will rise at the cost of fiscal slippage.

The economy is likely to face steep challenges in maintaining 7 per cent GDP growth. A McKinsey study states the country would require capital formation worth $1.3 trillion to sustain GDP growth at that level. Assuming that household savings stay constant (now at 24 per cent of GDP), corporate savings rate declines from the current 8 per cent of the GDP, and the Government spending and capital flow stays at the present level, India faces a net deficit of about $200 billion to achieve 7 per cent growth in GDP, or in other words, without this deficit, the country may land up having a 5.5 per cent GDP growth.

Market economists appear to pin their hopes on increased Government-private sector spending on infrastructure and more money at the hands of the middle-class – both rural and urban – to raise the level of non-discretionary consumptions.

Market also anticipates more cost efficiency from corporates and a fair bit of consolidation coupled with some shake-outs.

(Responses may be sent to jayanta_mallick@thehindu.co.in)