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Friday, Dec 03, 2004

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VIEW WITH EQUANIMITY

ON TUESDAY, NOVEMBER 30, India's most widely watched stock index, the Bombay Stock Exchange's 30-share index, Sensex, closed at an all time high of 6234.20. This bettered by a wide margin its previous record closing of 6194 on January 14, 2004. Equally significantly, the Sensex has not merely stayed at these levels; it went on to scale new highs on Thursday. Many besides statisticians and market participants read plenty of positive messages into recent market behaviour. The usual `correction' phase has not yet occurred. Even on November 17 when the Sensex went past the psychologically notable mark of 6,000, the feeling was gaining ground that the ongoing bull run would be more enduring than the previous stock price surges. Such optimism is based on the fact that this time the stock indices have crossed important milestones on the back of a sustained rally in share prices. There is no evidence of a share price bubble. Nor is there any indication of one or a few individuals driving up prices in the manner of Harshad Mehta or Ketan Parekh. There can be no doubt that strong fundamentals — a GDP forecast of 6 to 6.5 per cent, a continuing surge in forex reserves, reasonably good monsoons, and impressive corporate performance over the last two quarters — have been captured by the rising stock prices. Interestingly, it is not only Indian bourses that have witnessed such an impressive surge in share prices. Benchmark share indices in countries such as Australia, New Zealand, Brazil, and Mexico have risen to record highs at the same time. Global liquidity has been fuelling the stock market boom. In India, foreign institutional investors have pumped in almost $7 billion during this calendar year, with $1.7 billion coming in November alone.

Even a public rift between the two promoters of the Reliance group only momentarily stopped the Sensex's march. The Ambanis and the companies they control have the status of icons in share markets. However, for all these positive factors — suggesting a never before stability at high prices — one should not forget the basic lessons learnt the hard way from previous booms and busts. An overdependence on foreign institutional investors is not good for the health of the market at any time. Retail investors alone can provide stability over the long term. Recent Reserve Bank of India statistics show that households have been allocating only a meagre portion of their savings to stock market instruments, and that share has even been coming down. Last year, households diverted Rs.1.40 out of every Rs.100 they saved to stock market instruments compared with Rs.7.70 five years earlier.

Equanimity must be strongly recommended for all matters concerning Indian bourses. The Government and the capital market regulator have done well not to claim any special credit for the market boom. They should continue to focus on strengthening the market edifice and making the processes more transparent and accessible to many classes of investors. Equity investments are inherently risky. In markets dominated by large investors, small investors can get badly hurt if they enter late (as they might now). Investor education must continue as a priority item on the regulators' agenda. Currently the share markets have bounced back from the lows reached in mid-May. An unexpected regime change at the Centre led perhaps to a perception that major economic policies would be changed. Six months on, the markets are at record levels. Overseas investors have returned in strength. For policy makers at home, the message ought to be clear: it is unwise either to make policy decisions or test their validity on the basis of stock indices alone.

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