Not too many brokers are saying this yet, but the upside in Indian markets could rapidly fade out. Says a Morgan Stanley report released earlier this week: 'Equities may net a 9% return going forward'. This is not a forecast for 2006, but rather a longer-term view given current market levels and certain assumptions the report makes about GDP growth and capitalisation.
There needs to be a correction in share prices to make the long term more attractive for investors, says the report. That is a about the same as saying 'markets are getting overpriced at these levels'.
In any case, I share that view. Tightening liquidity is a big concern. While many things have changed since the early to mid-90s rally, one thing hasn't changed -- our fiscal management and fiscal constraints.
Corporations do have far greater ability to borrow abroad, but local rates will have bearing on their ratings abroad. How many quarters to go? Perhaps two more before one needs to start getting really worried. External capital flows and oil prices are some other things which may affect this, however.
The India Fund (CEF: IFN) 1-yr chart:
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