Big party, let's hope hangover isn't too bad

The year 2004 ended with a bang, with the BSE Sensex hitting a new all-time high. It closed at 6,602, for a weekly gain of 104 points. The mood is festive, the bull still has steam, corporate performances are laudable, inflation is contained and the sun is shining. Yet, as every reveller knows, the worse thing about an intoxicating party is the subsequent hangover.
A correction is both overdue and desirable as it would make the market healthier. The mood of investors, both domestic and foreign, however, is buoyant so the market would bounce back quickly after the correction.
Domestic investors have traditionally parked a bulk of financial savings into bank deposits. These have been considered safe and liquid. However, due to a sharp fall in interest rates along with scares such as the one caused by GTB, about the safety of the deposits, investors are considering alternative investments.
Several stocks are quoting at prices which yield dividends higher than deposit rates, with a chance of appreciation in a booming market. Given that dividends are free of tax, and interest not, there is serious shift of money from bank deposits to equities. Foreign investors, too, are gung-ho about encouraging economic and corporate performance of India which, so long as policies are not pulled too much to the left, should continue in the year.
The buoyant mood was not vitiated by boardroom battles at Reliance, India’s largest private sector firm with largest but one m-cap. Its board backed proposals put forward by its CMD, including one for a buyback at a price not exceeding Rs 570.
Infosys is to declare its quarterly results on January 12, and one would then see the impact a strengthening rupee (it hit Rs 43.5 to the $ last week) has on its performance. Given the way it has grown and business it has the capability of achieving, its current performance is not likely to be impacted by the strengthening rupee.
The banking sector is witnessing a consolidation.
First we saw a crisis consolidation, caused by the collapse of GTB and its absorption by a strong public sector bank, OBC. Now we are likely to see a planned merger of two public sector banks, BoB and Dena, resulting in the creation of the third largest bank. OBC itself is to make a huge IPO in end-February, which would be an opportunity worth looking out for.
The FM announced raising foreign investment limits in banking, telecom and insurance. For some strange reason, one is reminded of the story about the boy who cried wolf. Sahara and Jet have been able to fly abroad, (except to Gulf). New entrants such as UB, are not allowed to, until they gain five years experience.
In an effort to rein in liquidity-driven rally, the RBI has tightened margin requirements on banks for lending against shares.
The margin is now at 50%, up from 40%. This is a good move to avert the possibility of a later fall.
The market ought to correct itself; one which would make it healthier for the next upmove. The trigger for possible correction is not apparent unless it is led from abroad such as a collapse of the housing market in US or of its dollar. Buying into correction would be advocated.
Wishing readers a great year ahead.