Stock market - time for a reality check

(T P Raman is Managing Director, Sundaram BNP Paribas Asset Management. The opinions expressed are his own)

By T P Raman

As a heady quarter for equities has drawn to a close, it is important not to get carried away. The spurt has been akin to August – October 2007 aided by liquidity from foreign portfolio investors. Inflow of close to $ 8 billion helped erase the outflows suffered in January and February and the net FII investment is close to $ 5 billion; money has been taken out in the past ten days.

This number is quite heady and comfortably in excess of what used to be the money that came India’s way till 2003. This is not a number to be scoffed at and indicates the fact that India figures prominently in the calculus of global investors even after the meltdown of 2008 and a reduction in risk appetite.

Such just liquidity-driven uptrend has to be eventually backed up by underlying trends in the economy. In this respect, it is a story of not so much FY 2010, but FY 2011 that could deliver numbers that may provide an underpinning to the sharp rise in stock prices. What is important is the rally has priced in much and now we need to have fundamentals play catch up. We would closely track this aspect.

This is still not an environment for investors to get exuberant about any asset class. Even if one takes a look at India, the situation based on underlying economy could have been different but for the clear nature of Verdict 2009 in the Lok Sabha elections. In this backdrop, it is important for investors to have a well defined asset allocation plan and stick to it. This will ensure that exuberance and mistakes are avoided to a great extent.

REALITY CHECK