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V Shankar Aiyar
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AU CONTRAIYAR
Global
Bulls Run Again
The signs are unmistakable. US tech engine
Nasdaq has climbed 1100 points from its March low of 3164, old economy
war horse Dow Jones is 500 points short of its peak and even the dour
FTSE 100 has finally surged close to its historic high of 6931. Stock
markets across the globe are humming Come September as the bulls
seem set to go on the rampage yet again. Drumming hooves across equity
markets seem to have awakened Dalal Street too. Having spent the better
part of the last six months masticating, the desi bulls added over 100
points in just one trading session on Monday to push the Sensex over the
pyschological 4600 mark.
Coming as it does --- close to the the bear run of April --- the
bullishness does raise skepticism. After all, it is only six months since
the Ides of March cleaned up the tech and old economy sectors in late
March and early April. The technical truth seems to be that equity markets
across the globe are set for a second bull run of the year. As earlier,
the momentum comes from across the Atlantic, from news of a "sustainable"
growth rate in the US economy. And as with the earlier rise and fall,
the trigger for the upward momentum comes from Alan Greenspan who has
let off the US markets with a "no interest rise period" thanks
to the new theology on productivity gains.
Bearish cynics would much rather credit political expediency and the
Presidential polls for the respite and perhaps the subsequent "irrational
exuberance". In fact, it is their contention that the reasons that
led to the bears' March haven't yet been addressed. That the US economy
is still growing too fast. That communication stocks --- which form a
large part of the TMS song being sung in stock markets --- continue to
be vulnerable to technological changes and consequent loss in revenues
as evidenced by the fall in European telecom scrips following the UTMS
auctions. Neither investors nor bulls seem to be overly touched by the
concerns. Indeed, prompted by the bulging budget surplus in the US and
some economies in the Euro zone, those who went away in May like the wildebeest
in the African
savanah seem to be rushing back. So what does all this behold for Dalal
Street and the desi bulls? Conventional wisdom has it that thanks to the
weightage of the ICE sector on benchmark indices, the Sensex will but
mirror the US markets. In other words: move north. Sure there are enough
factors to make the bulls continue masticating on the sidelines: the rupee
is sliding, there is little or no movement on the disinvestment front
which is actually sliding backwards, the index for industrial production
has been sliding and there is always the prime minister's health to worry
about. But the positives seem to outweigh negatives.
Indeed, the market believes there is more than just conventional wisdom
backing the claims of a possible bull run this time. There is what the
pundits call the technical rationale. Consider the arguments:
- Just
in August Foreign Institutional Investors have pumped in over $280 million
into Indian scrips. This is up from a negative (that is, withdrawal)
of $317 mn in July and $218 mn in June.
- The Government
has cleared several cobwebs blocking FDI into the country. This would
improve the rupee's position and also help improve corporate confidence
levels;
- The Prime
Minister's Office has pushed through a slew of reforms in the telecom
sector opening not just basic telephony but the rapidly growing cellular
and internet markets.
- The prime
minister's forthcoming visit to the US is expected to
facilitate new investments not just in the telecom sector but also in
the up-for-grabs offerings by the Ministry of Disinvestment including
Air India.
But the big tag reforms which will unleash the bulls comes not from
the North Block or the Finance Ministry but the Reserve Bank of India
which has re-invented the laws that govern banks' investments into the
equity markets. Till date, banks were allowed to invest barely 5 per
cent of their incremental deposits (that is, new deposits) in stocks.
Thanks to this conservative methodology of determining investible surplus,
the total exposure of banks in stocks has been less than a per cent
of total market
cap.
All that would change now. The RBI has re-invented the methodology of
determining investible surplus. As per the RBI's new guiding mantra,
banks can now invest 5 per cent of the total outstanding advances. In
English, that means that banks can now invest 5 per cent of the money
already lent via various instruments into stocks. The rationale being
if they can take
a risk on the companies, why not their scrips? So banks can now invest
over Rs 23,000 crore (5 per cent of Rs 458,000 crore or a little less
than 3 per cent of the current market cap).
Of course, there is also this little fact that the annual bonus of fund
managers is calculated around November 15. The cynics would have you
believe that no fund manager would let his funds languish at lower levels
of indices and take home a smaller packet. Therefore, the markets are
bound to move north, the indices find new highs, investors feel rich
and UTI Chairman P. Subrahmanyam's forecast of Sensex at 6000 by Diwali
---
which was laughed out of the market in July --- may yet come true. The
wealth effect may just prompt consumers to spend and take the Indian
economy's GDP to the promised levels across 6 per cent. All in all,
it's feel-good time once again.
Till the bears come home to roost again, perhaps in December. Sure not
everyone will survive the ride. But that is natural. Survivors will---
a la Darwin --- emerge stronger. The denizens of Africa's Serengeti
Wildlife Park have lived and proved this truth year after year. As I
said in May (http://www.india-today.com/webexclusive/columns/aiyar/20000530.html).
"Darwin's theory requires evolution, both of the body and the
mind, to survive. As deigned by the doctor, only those species which
evolve will survive. The rule holds as true for markets as it does for
the denizens of Serengeti."
(V
Shankar Aiyar is Associate Editor, INDIA TODAY. He is based in Mumbai.
Write to V. Shankar
Aiyar.)
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