'I've been waiting for this government for 12 years'

The stock markets have greeted the new government with a huge surge and are set to achieve greater heights. Expectations are huge too and if they are not fulfilled, the sentiment could be reversed. The government will have to act quickly to maintain the momentum, Andrew Holland, CEO institutional equities and equity proprietary trading, Ambit Capital, tells Business Standard's Rajesh Bhayani. Excerpts:

Things appear to have changed overnight because there is a stable government at the Centre?

Things haven't changed overnight. I have been in India since 1997 and I have been waiting for such a government for 12 years. Others may have been waiting to see this for two decades.

After a long time, India has a government not facing pressure in implementing its own agenda for reforms. In the current global turmoil, India has an opportunity to emerge as a significant power in Asia.

The view is that the next decade will be India's decade as now there is a government not encumbered by coalition politics. India is back on the world stage to seize opportunities and continuity is expected for at least the next five years.

How big can this be from the market's perspective?

Let's be clear. Just because there is a stable government at the Centre, people will not start buying steel or cement. Fundamentals will change over a period of time, but the sentiment has improved certainly.

In the first year, the government is expected to draw a roadmap for reforms. Investors are waiting for three things to happen:

The Union Budget, the government's plan to contain the fiscal deficit and the roadmap for reforms. Also, the manner in which the policy framework will be redesigned in order to attract foreign direct and portfolio investment will be an interesting development.

So, is the market waiting before it takes further action?

I think, in the long term, the market is set to bounce. Although fundamentals will take time to recover, the market will start discounting future earnings.

The Sensex EPS of Rs 850 may go up to Rs 1,200-1,300 in 2012 fiscal, with GDP growth at a sustainable level of 8 per cent plus. If this happens, the Sensex between 20,000-25,000 points in the next 12 to 24 months can be justified. It all depends on how the new government will implement reforms and contain the fiscal deficit.

Then what is the downside?

If these expectations are not fulfilled, there can be a fall. But the fact that there is a stable government has helped improve the valuation base. Earlier, at index levels of 8,000 points, the Sensex was looking very attractive.

That bottom is now between 10,000 and 12,000 points. At that level, buying will start again. If there is no progress on the reforms front, there could be problems. The risk is much higher today.

However, a government not encumbered by coalition politics with a high domestic growth potential is expected to do well at the global platform.

When will we see a vibrant primary market where companies will enter to raise money for capacity expansion?

Let's not forget that world economies are still contracting. Export demand will remain affected. Many companies are working at lower production capacities in India also. Improvement in domestic demand will lead to higher capacity utilisation.

This, in turn,will mean setting up of new capacities.

So, companies may not come to the market to raise money immediately. If big investments come into infrastructure sectors, like the power sector, the situation can change significantly. There is a huge potential in the sector and its growth will percolate to other related sectors.

So, any improvement in the primary market will take time...

The primary market has already shown signs of improvement. Recently, three companies together raised nearly $2 billion through the QIP route.

More deals could happen. Private equity deals would be closed faster. Disinvestment is expected. These could keep the secondary markets in check as some funds would be diverted to the primary market.

Some market reforms like asking institutional investors to put 100 per cent money, instead of 10 per cent now, with IPO applications could affect the sentiment...

If foreign investors want to put money, regulations won't come in the way. They invest because they want to be part of the growth story.

Stock market players would look for reforms in the insurance and pension sectors and banking reforms. The key, though, lies in getting more investments into infrastructure sectors like power.

When the Satyam scam came to light in January, foreign investors started talking about the lack of corporate governance and many asked for a forensic audit of companies in which they were investing. Do you think such concerns will act as hindrances in getting foreign funds?

Such concerns are important issues that need to be addressed. However, when the going is good, let me assure you, investors pay less attention to these as long as they continue to get good returns.

That, of course, doesn't undermine the need to improve corporate governance and management of companies.

If more foreign money is to come to Indian market, it will be from hedge funds or long-only funds initially?

It will take time before long-only funds change their strategies to put money in India. Once that happens, huge funds will come. Hedge funds can act fast, but they have not performed well in recent months and their assets have eroded.

Not much fresh money is coming to them. If they get incremental money, that can be diverted to India. In the last few days, the rise of the Indian market has made many funds overweight on India.

Because Indian stock prices have gone up, they may be adjusting portfolios within a fund and putting more money in the Indian markets, but fresh flows would depend upon how much more incremental money the hedge funds are getting. Funds may move from underweight to neutral.

I personally believe huge flow can be expected from West Asian countries. They have money and will prefer to put it in markets like India rather than China.

What should we look for in a bull run?

Investors should look for the next emerging leader in every sector. For example, try to find out if there is any other ICICI Bank in the making.

As a sector, apart from infrastructure, education will be the biggest growth area followed by health care. Logistics is another promising sector. People say retail will be important and I don't deny this, but logistics will be important as growth of retail is linked to logistics.

Should we draw a line of caution?

Expectations are high and hence the disappointment level will be very high if expectations are not fulfilled. The government should act quickly else the mood might get spoilt. Last year, as values eroded and the currency depreciated, FIIs lost money.

Now the currency is appreciating, but FIIs have started hedging for currency risk -- this is a good sign.