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Journalism of Courage
Could it be that the Indian market is taking the ‘India shining’ ad campaign too seriously? Maybe. And maybe more seriously than it ought to. Yes, India is a good turnaround story. Yes, the market has been undervalued the past few years. Yes, the future looks bright. But will you double your money betting on the Sensex this year? No, that looks unlikely, whatever the ‘experts’ say on TV every day.
The tremor of excitement after the Sensex hit 6,000 has been spreading and small investors are now looking at the market with a view to repeating the gains of 2003. Before you get carried away, remember one thing, the stock market is only an indicator of the well-being of an economy, more specifically of the corporate sector of a country. Any gains on the markets must have an underlying reason in the real economy. This means, the markets will rise in relation to the growth and potential growth in the Indian economy, corporate efficiency and interest rates. Some counter points to the reasons being given for a repeat of the 2003 capital market story:
1. The markets reflect India’s growth story. The US economy grew by a huge 8.2 per cent in the last quarter of 2003. But Dow Jones Industrial Average, the benchmark index of the New York Stock Exchange (the largest in the world), moved up by only 25.3 per cent during the entire 2003. China is the fastest growing economy in the world with a growth rate of nearly 9 per cent. Its productivity is soaring, forex reserves at $450 billion are rising faster than India’s and its foreign investment is going through the roof. But its Shenzhen Index rose by only 45 per cent last year. India’s growth was 5.7 per cent in the first three months of 2003-04. This, then, picked up to 8.4 per cent in July-September, it is now projected to grow at over 7 per cent. The Sensex has gained over 100 per cent from the low of 2,930 in April 2003 till now, the only countries to gain more than this have been Thailand, Argentina and Brazil. Yes, the market has made up for being undervalued, but it may not have the steam in 2004 that it had in 2003.
2. India has $100 billion of forex reserves. But nearly half of this amount is accounted by foreign portfolio investments and non-resident Indian deposits. This part can vanish from the country in a few days. Almost all Asian countries accumulated forex in the same manner leading to instability. So, while the forex reserves are a comfort, they may not drive the markets any higher that they are today.
3. India’s price earning (PE) is still very low. India’s price-earning ratio of about 18, lower than that of Singapore at 22.2 and Taiwan 41.9, is good news. Sure, but remember the PE ratio is only an indicator that tells by how much you are valuing each rupee of earnings. If today people are willing to pay Rs 18 for each rupee of earnings, then it is justified if accompanied by the predicted growth. But if the current growth fails to pick up momentum, it may be difficult to maintain the current valuations or the current valuations may not rise further.
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The Mutual Fund option
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| At these levels of the Sensex, that is, 6,000 and above, it is very dangerous for the average person to invest in individual stocks. The best option then is to go for a well-diversified equity mutual fund. For the one who wants to take even lesser risk, a part-equity, part-debt mutual fund would be ideal. The investor must have an idea of what kind of investment pattern he wants and match that with what the mutual funds have to offer. One must avoid sectoral funds, unless the investor has special knowledge in the particular sector. At the same time, he must follow the markets and track how his fund is reacting to these movements. When the market starts falling steadily, say 300-400 points over a period of time, it’s a sign that the market has peaked out.
N Sethuram, |
4. Inflation levels are low. Inflation is actually inching up to the six per cent level again. More worryingly, the government’s fiscal deficit rose to Rs 93,656 crore till November, which is 61 per cent of the budgeted estimate of Rs 1,53,637 crore for 2003-04. This indicates the government is slipping on the deficit front. The government will have to fill the gap by borrowing more from the market, putting pressure on interest rates, slowing the capital market party.
Keep in mind the fact that elections are around the corner and could this sustained euphoria be a pre-budget roadshow? The SEBI move to allow margin trading and stock lending in an overheated market raises more questions than answers. And now, the government has offered massive tax cuts in its mini-budget, adding to the bull frenzy, and the suspicion that the government is going in a calculated manner to retain the euphoria.
Should you at this level enter the market? The market was undervalued in the beginning of 2003, but to keep the momentum going would need a GDP growth of at least 8.5 to 9 per cent for the full year 2004-05, corporate profits growth of 40 to 50 per cent, more FII inflows than last year, a good monsoon in 2004 and high growth of 7 per cent in the farm sector. All this may happen, but then, it may not. Remember that some of the ‘feel-good factors’ could have been generated to keep the market at a high level and make investors happy ahead of the elections.
Then again, all this does not mean that the markets will collapse. To reiterate, the market rise has been based on real factors, but to expect the run to continue is naïve. There is steam left in the market and expect between 10 to 15 per cent growth in the markets over the year. Remember that in all previous boom periods, retail investors had entered the market after stocks had zoomed and lost money. Those who had to double their money have already done so. Be happy in 2004 with more mature returns.
Inputs from Shefali Anand
