Fresh retail investments worth Rs 10,000 crore (Rs 100 billion) in the next fiscal is expected to provide the liquidity needed to drive the equities market upwards. The liquidity will raise the valuations of the equity markets.

HDFC Securities in its latest report has projected a bullish view of the stock markets with foreign institutional investors also expected to chip in and make their presence felt in a big way.

Stocks offering valuation, growth and those with high dividend yields are projected to be the main picks for the next fiscal. Under valuation plays the stocks are Tata Steel, Grasim, ONGC, Mahindra & Mahindra, Bajaj Auto and Bharat Heavy Electricals.

Among the growth stories are -- Mastek, Digital, Eicher Motors, Jindal Steel & Power while investors interested more on the dividend yielding companies can opt for Tata Chemicals and GE Shipping.

The optimistic projections are based on the improving fundamentals of the corporate sector -- for instance cash flows have increased by 26 per cent compounded annually between 1996 and 2002. The debt equity ration has improved from 1.55 in fiscal 1999 to 1.36 in fiscal 2001.

Payouts have also increased during the last decade. From 25 per cent in fiscal 1992 the payout ratio has grown to 47 per cent in the last financial year.

"Continuous improvement in dividend yields is expected to protect downside risk of return on equity investment," the report said pointing out that higher payout would further improve dividend yields while the interest rates are expected to remain stable.

Vijay Kelkar's recommendations on the tax front -- especially with respect to abolition of capital gains tax -- is expected to be a boost for the capital markets.

Exemption of dividend tax and consequently high dividend yields will make equity investments more attractive than investments in government securities, where a dividend yield of 5.8 currently pre-tax will translate into a yield of slightly more than 4 per cent post-tax.

The prolonged bearishness in the market with certain sectors being more hit than the others has resulted in a steep drop in valuations. "Valuations have declined sharply over the last year with fundamentals catching up," according to the report.

Liquidity, is of course a major reason for investments - so far retail investments in equities has always trailed dividend payouts. Last fiscal dividend distributed was more than Rs 18,000 crore (Rs 180 billion) while investments in equities was negative (on a net basis).

There are a whole lot of reasons for the household sector to get into equities -- interest rates are going down and along with it, the returns from debt market instruments, housing has been in the slump for more than two years now and is getting increasingly unattractive as an investment other than for residential purposes for one's own use, while again the rates on bank deposits are lower than dividend yields.

The government savings schemes are going to become market related soon and the interest rate scenario do not hold out much prospects of the high returns they have paid out so far.

However the report has also pointed out some events, which could spoil the 'equity party" - geopolitical instability in the Middle East and north east Asia, good politics and bad economics, and another bad monsoon.