Is it party time or a bit too early to open the champagne cork?
Last Friday when the Bombay Stock Exchange’s Sensitive Index (Sensex), a barometer of the health of country’s stock
markets, briefly crossed the landmark 15,000 figure,everyone connected with country’s stock markets became
euphoric.
The total market capital of Indian stocks reached a huge $1.08 trillion or Rs 4337 lakh crore. Sensex kissing
the 15,000 mark, a record in the history of India’s stock market, is a matter of rejoice and of great significance.
But why are the stock indices booming and what does it mean for the investing public?
These are more pertinent question at the moment rather than the 15K figure itself.
Investors also wonder if this is just another stock market bubble that will burst like the 30 per cent crash in Sensex in May 2006.
The investing public can not be blamed if such questions disturb them because most of those who invested in the
capital market — in stocks or in equity mutual funds — have lost huge money after the last crash.
But without getting into the speculation of whether the stock markets will go up further or not,we can assure
you that the reasons behind spurt in the stock indices this time are different. They are not only based on strong
fundamentals but also supported by investments from well informed value investors,namely foreign institutional
investors (FII) andmutual funds.
Narrow rally Before getting carried away by the lofty Sensex, the investors should make a note of some important developments that will help understand the situation much better. Firstly, analysis of the data shows that the bull run this time was on a narrower base.
The Sensex moved up 1,000 points from 14,000 to 15,000 in the span of 146 trading days but there are a large number of sectorswhere the indices actually dropped. The sectors like automobiles,IT, fast moving consumer goods (FMCG),healthcare actually lost value while sectors like oil & gas, capital goods, metals,consumer durables gained much more than Sensex.
Another example of narrow rally is that in the run up from 14,000 to 15,000 only 1,353 companies showed increase in prices while 1,390 companies showed decline.
Clearly, the rise of Sensex is largely due to the rise in share prices of companies like Reliance Industries,
Larsen & Toubro, BHEL,Tata Steel, Bharti, which have large weights in the index.
Large buyers’ pull Another remarkable point of the current bull-run is that the market moved mainly due to large investmentsmade by foreign institutional investors (FII) and Indian institutional investors.
Unlike in earlier rallies,this time retail investors’participation was very small.
The fact that a vast number of midcap and smallcap stocks are still quoting lower than their 52 weeks low, is a
testimony of lukewarm response from small investors.
On the other hand, cumulative investments by FIIs in Indian stocks touched $55 billion, with about half of
that coming in the last two years.
More headroom That brings us to the question if the honeymoon will continue and will Sensex reach new heights? The opinion is divided: while some feel bull run will continue and Sensex will touch 20,000 in a year, others think Indian market is already expensive.
Many believe that the valuations,as reflected in the PE (profit/earnings) figures, are slightly higher this time:
the PE ratio on last Friday was at 22 against 18 in February last year.
But when compared with other important markets in Asia, India still has headroom to grow. As oppose to Sensex’s growth of 6.77 per cent in the time frame when it grew by 1,000 points,Shanghai Composite of China jumped up 41 per cent.The key index in South Korea went up 32 per cent,Thailand’s SET by 26 per
cent and Singapore’s Straits Times went up 17 per cent.
Growth story FIIs are coming in hoards and pouring in money in India because they are convinced in the India story.
Even after the steady increase in prices, India’s stock valuation is low, in relative terms, when compared with some other emerging markets in South America and South-East Asia.
Then there are plenty of other good reasons. The economy is expected to maintain a 9 pc plus growth rate, next only to China. Inflation has been brought under control, the currency is getting stronger and foreign exchange reserves are rising.
Add to it the large domestic market where demand for goods and services are picking up due to increased consumer spending.
And of course, corporates are showing higher sales and profits in every passing quarter. The breadth of the stock market is also widening as many new companies are raising funds through share issues. Public issue of shares have already garnered about Rs 40,000 crore in the first 6 months of 2007,double of last year. As there are many large issue in the pipeline, the share issue can easily cross Rs 100,000 crore in the current financial.
The difficult question Now you must be convinced that flare up in stock prices was not a bubble. But the next obvious questions are “How long will the party last? Should I buy shares now?” Unfortunately, no one has a definite answer. Investment in share market is by definition risky and the market is also driven by sentiments which in turn depend on a whole lot of intangibles which can create sudden uncertainties and upset
all calculations. There is also no guarantee that FIIs will continue to pour in money if the other emerging markets in the globe look relative more attractive. The biggest dampener can be a sudden and sharp increase in crude oil prices adversely affecting the economy,which depends on imported oil.
Surely, you will be hesitant if you have burnt your fingers last crash. But for a person with ability to take some risk, it may not be a bad idea to invest in stocks now.Look at the prices, fundamentals, valuations and judge if they can generate returns even from today’s price. If you are comfortable then take a plunge. You may also get some opportunities to invest in good stocks at low prices as quite a few IPOs are in the pipeline.