The Indian capital market is riding on the back of
a strong economy. The market is in a bull-grip, with the economy
on the growth path.
The benchmark Bombay Stock Exchange Sensitive
Index (Sensex) scaled past the 4000 mark in August after a two
year gap. The feel-good factor amongst all classes of investors
is reflected on the bourses lifting the Sensex past the 4300-mark
on September 01. The buoyant trend continues to prevail on the
bourses on sustained buying by foreign institutional investors
(FIIs) and retail investors.
In August alone, the Sensex saw a rise of
452 points while the net investment of FIIs in the stock markets
during 2003 has already crossed $3 billion mark. The market believes
that the Government is basking in the best of times. Low inflation,
high foreign exchange reserves, a trade surplus, a benevolent
monsoon and declining interest rates are some of the factors boosting
the market sentiment. The strength of the current rally can be
tagged with the strong fundamentals of Indian economy.
Every time stock market indices climb, a
hunt begins for "fundamentals", that is, economic data
substantive enough to ensure that merely the brokers’ whims or
worse motives do not drive the market. This time the search for
fundamentals is easy. Good monsoons and the positive impact on
consumer goods industry may have already been factored in by the
market. But it could feel happy about a string of good corporate
results and reports that, after a long time and finally taking
note of low interest rates, the industry is looking at big-ticket
investment. Official data on the rise in exports and low inflation
could have encouraged the informed market operator as could have
independent assessments of key sectors like automobile, housing
and construction materials and capital goods, all of which reported
a brisk activity. The Centre’s excellently conceived and well
implemented national road building programme has not only made
long-distance road journeys a pleasure in parts of the country
but has also had many economic spin offs.
Bull Run
The current spurt in the Sensex is also the
second highest bull run in the history of Indian capital markets;
the biggest being a 2,400 point rally (October 1991 to March 1992)
when the Sensex moved from 1,885 to 4,285 points (127 per cent)
in six months. In percentage terms, the current 38 per cent-plus
surge is the fourth largest till date. However, it would be inappropriate
to compare figures in percentage terms as they are based at different
levels of the Sensex. The three other big movements are based
on Sensex values less than 3,000 points, the base for the present
run.
An examination of the data reveals that large
movements in the equity market were first seen in 1991 (April-September)
when India was thrown open to foreign institutional investors.
In the first six months after April 1991, the Sensex moved up
50 per cent from 1,205 to 1,885 levels. Subsequent to that, the
largest upsurge was during the following six months, wherein the
Sensex moved up 127 per cent from 1,885 to 4,285 levels, though
this bull run was inspired by Harshad Mehta and expectations of
foreign money coming into Indian equity market.
Foreign institutional investors were allowed
to buy stocks of Indian companies in 1992. Since then the movement
in the Indian equity markets has largely been on account of the
viewpoints that FIIs take on India.
Feel-Good Factor
The feel-good factor, which had eluded the
stock markets for quite some time, is back. The 30-share BSE Sensitive
Index continues its upward journey, much to the relief of market
players, investors and the Government. The difference between
this rally and others is rooted in fundamentals. There are several
reasons why this market upturn is being seen as genuine and not
a bubble which can burst, thanks to unscrupulous market entities.
The current market rally comes on the back
of a strong showing in the first quarter by Indian corporates,
particularly the smokestack companies and the traditional economy
companies. Whether it is steel or auto ancilliaries, textiles
or even banks, the current bullishness is being felt across the
board, cutting across sectors.
Most corporates today are either through
with, or on the last leg of, major restructuring efforts. Banks
are feeling the positive effects of the landmark Securitisation
Act, which has errant borrowers running to the negotiating table.
The economy is clearly looking healthier now than it ever did
in the past three years, causing the revival of consumer spending.
Consequently, the yawning gap between demand and supply –which
had caused a glut in sectors like steel, cement, consumer durables
and automobiles earlier – is now gone. Added to this is the soft
interest rate regime which has increased consumer spending in
sectors across the board. One of the crucial inputs to the return
of the feel-good factor in the bourses is the monsoon which, despite
initial jitters, proved better than average.
Global Investors
The Indian stock market is being re-rated
by global investors. The recent run-up in Indian equity prices
has been independent of the behaviour of global market and reflects
a growing demand for Indian Stocks even when investment sentiment
elsewhere is weak. For years, market analysts have held that Indian
equities were undervalued due to poor demand and lack of funds.
Only a handful of domestic mutual funds dominated the market and
there was a lack of investors with deep pockets. This made the
markets volatile and lacking in depth. The entry of a large number
of foreign funds has filled that gap and helped in improving the
overall rating for the stocks.
The sharp upturn in Indian economic fundamentals
is supporting the unprecedented rally. This has made Indian equities
outperform most other global markets and has defied all expectations
of a technical correction by analysts. Fuelling the rise in stock
prices is the copious flow of funds from foreign investors who
have finally woken up to the Indian growth story.
The most important aspect of the current
market rally is its width. This means that the rise in stock prices
is virtually across the board. Almost all sectors of the economy,
particularly the manufacturing and cyclical, have been the biggest
gainers of this run up.
The huge foreign financial institutions (FIIs)
buying in manufacturing, oil and gas and cyclicals and other stocks
provides us clues to the future of the market. The FIIs buying
in these secotrs is not the extension of some sort of a global
trend. The buying in these stocks is the result of value hunting
by FIIs and should provide the Indian market with long-term funds.
(PIB Features)
*Senior Journalist
