The Hindu Business Line : The case for staying invested

DIVERSE as they are, the views of both foreign brokerages and domestic fund managers on the market are compelling. There is still, it seems, a case to be made for investing in Indian equities from a long-term perspective.

To begin with, liquidity is not likely to dry up. Interestingly, brokerage houses Morgan Stanley and UBS have acknowledged the possibility of sustained interest from FIIs as a key upside risk in their reports.

In the near term, the FIIs may choose to divert their funds to other emerging markets, on the basis of its relative-valuations. There are however, several qualitative factors that could ensure that the FIIs remain invested.

Domestic brokerage house Enam believes that while there are signs of a slowing down in corporate profitability, factors such as the favourable demographics, corporate competitiveness manifest in the outsourcing boom, stable economy led by reformists, a superior financial structure among emerging markets and a domestically-driven economy, are likely to ensure that the long-term story is intact.

Besides Indonesia, India is the only economy that is expected to grow at a higher rate than it did the previous year.

The increase in the number of FIIs registered and the fact that several investors are considering entering the market now shows that not all FIIs feel that the market is overpriced. Private equity funds such as Warburg Pincus, Janus Capital and Actis Capital remain bullish on India. Actis recently raised $325 million for its second Indian investment fund. Mr Charles R. Kaye, co-president of Warburg Pincus, in a comment on the Indian markets in a Bloomberg news story in August, said the increase in the number of participants in the private equity industry has made the market more interesting and that India remains an exciting and robust market.

Enhanced retail investor interest also augurs well for liquidity, although it is unlikely to drive the market the way FIIs can. Mutual funds are becoming a more significant provider of liquidity to the market. For instance, in FY04, mutual funds purchased Rs 450 crore worth of equity. And between April and September this year, they have invested Rs 7,250 crore.

Second, the universe of these foreign brokerages is restricted to 50-60 companies, typically those with a market capitalisation of more than Rs 10,000 crore. There may be several stocks outside this restricted universe which are capable of delivering attractive returns over the next couple of years. Fund managers, who track as many as 200 stocks, believe there are still several quality stocks in the mid-cap space, where the FIIs have just begun to participate.

Third, the FIIs have the flexibility to invest in several inflation-beating assets — from emerging markets to gold to commodities. They are, therefore, better placed to scout for superior investment alternatives. For the domestic retail investor, however, equities still present the best investment option among asset classes, even if they may not deliver the kind of spectacular returns they have over the past two years.

While the outlook is positive over the long term, investors would have to be prepared for volatility. In a liquidity-driven rally, markets do tend to race ahead of fundamentals from time to time. They could then correct subsequently, either by way of a decline or a period of flat returns till earnings catch up.

Investors who prefer to tread cautiously could consider investing via the mutual fund route. Most funds tend to outperform the indices even during a correction and would provide better protection to your capital compared to a direct exposure to equity. Funds such as HDFC Top 200, Franklin Prima, and SBI Magnum Contra can be considered.

Investing small sums of money regularly, through systematic investment plans over a period, would minimise the risk of bad timing and avoid exposing a substantial sum to market volatility.

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