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May 22, 2009

What could go wrong?

Now that the stock markets have received the positive surprise from the elections with such a strong thumbs up, the focus shifts to whether the new government delivers on the heightened expectations. Writing in the Business Standard, Akash Prakash of Amansa Capital points out what - if not delivered upon - could end up disappointing the stock markets.
What can go wrong? Obviously, the new government can fail to act and continue dithering on policy action. If we see no action and just continued setting up of committees and groups of ministers, then that would be extremely unfortunate and set us up for huge disappointment.

Sign posts that investors will be using to calibrate the heightened expectations begin with the new cabinet....The next important milestone will be the budget itself. What is the game plan to tackle fiscal issues, better targeting of subsidies, infrastructure funding, the GST, etc?

Independent of the government being indecisive and frittering away the mandate, the only other negative in this scenario is the huge and almost inexhaustible supply of paper in the pipeline. Corporate India has already raised about $2 billion in the last 10 days, and the tap is now wide open. Combined with some disinvestment from the government, we could easily see $8-10 billion being raised in equity capital this year. This will act as a natural cap on the markets, though it will be great in boosting domestic capital formation and growth.

Valuations are not really cheap either, though earnings are likely to get upgraded, and this can also cap the markets upside, at least in the short term.


Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in