The Hindu : Business : Sensex and sense

Online edition of India's National Newspaper
Monday, Nov 29, 2004

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Business

Sensex and sense

Will the stock market get over its overwhelming focus on the Reliance episode? To a large measure that question will give clues on its maturity.

PLENTY OF significance was read into the movement of the benchmark sensitive index (Sensex) of the Bombay Stock Exchange to above the 6000-mark at close on November 17. The fact that it stayed above this psychologically important mark the next day gave rise to hopes that the rally will be more enduring than it was on previous occasions when the Sensex breached 6000. Unfortunately that was not to be. On November 19, the market fell sharply, supposedly reacting to a purported statement by Mukesh Ambani to a TV reporter. That seemed to suggest that the differences between the two brothers, Mukesh Ambani and Anil Ambani, the subject of many rumours, had become public. The market closed 64 points lower that day. The Reliance group scrips came for heavy selling.

As far as the stock markets were concerned, it looked as though a strong rally, backed both by fundamentals and improved sentiment, was in danger of petering out seemingly because of a simmering family feud coming into the open. While rumour mills worked overtime and several theories on how and why highly successful family businesses had not planned orderly successions were doing the rounds, the Sensex slipped early on November 22 to as low as 5877.97.

Disturbing episode

It was only after Mr. Mukesh Ambani issued a clarification — front page advertisements were released in all newspapers — that the markets recovered sharply and the index closed at 5963.80. He said that his remarks were quoted out of context and that his father Dhirubhai Ambani had settled `all ownership issues' pertaining to Reliance within his lifetime. This is not the first time that a quote, taken out of context, had such major repercussions. Given that the Reliance group and its promoter, the late Dhirubhai Ambani have been stock market icons, even speculative reports of differences between the two brothers have far reaching consequences. On November 23 the Sensex was back to above 6000 and closed at 6009.86.

Have the good times returned? Have the worries over the purported differences between the Ambani brothers dissipated in the wake of the clarification? It is too early to tell but one or two points from recent stock market behaviour are worth a repetition if only to show that several deeply ingrained myths are hard to shake off.

The first of course is the wealth effect. That the stock market creates (or destroys) wealth is beyond doubt. Yet the way a bull run leads to such hype somehow renders even the positive contributions from a buoyant market redundant. But all the profits are book profits. Investor sentiment may be better in a bull run but the more seasoned among them will keep away (or more sensibly book their profits) at current levels.

As for individual wealth, the stock market does give a clue. But is there any benefit from such an ephemeral valuation of individual wealth if one day an Indian IT entrepreneur — say, N. R. Narayana Murthy or Azim Premji — is among the world's top billionaires only to slip in the rankings as the market tumbles. There is no doubt that the wealth effect has been misunderstood, sometimes deliberately. Mind boggling sums were allegedly lost on `Black Monday' (May 17 this year) when the new UPA Government at the Centre and certain political parties articulated their `anti-reform' stance. But as the market regained and crossed the 6000 level not a word has been said about the ruling alliance's impact on the market.

Besides, there has been an unnecessary posturing on both sides. One view has held that the stock market is a casino and that its behaviour is no clue to the relevance of government policies. On the other side are several experts who opine that no better barometer of economic health to replace the Sensex has yet been devised. Both views are extreme. Stock indices have a value and no official policymaking can ignore it totally. Unfortunately in India there has been a hiatus between the stock markets and policymakers.

To put it rather simplistically, the intricacies of the market are not understood by policymakers. On the other side are those who have a vested interest in exaggerating the importance of stock market movements. A Sensex movement above 6000 is a welcome development provided it is sustained.

The rally this time has some strong fundamental factors driving it: a GDP growth of 6 to 6.5 per cent, continuing surge in forex reserves, reasonably good monsoons, good corporate results and a softening of oil prices. Also, there has been tremendous interest in Indian stocks among overseas investors. FII inflows spurring liquidity is the main cause for this phase of stock market buoyancy. However, a somewhat tendentious interpretation of a statement made by Mr. Mukesh Ambani was enough to send the indices sharply downwards. That episode, judged by subsequent reports, is not going to end soon.

Are the markets going to focus on the happenings in the Reliance family — important though they are — leaving out other developments, both positive and negative?

C. R. L. Narasimhan

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