Opinion - Editorials   

Markets at a historic high

The 10,000 mark reached by the Bombay Stock Exchange Sensex is an important milestone representing a robust performance by the corporate sector, and in particular by the 30 companies comprising the index. For judging the health of the economy, however, it becomes all the more essential to separate the hard facts from the hype. Strong stock market performances — the broader 50-stock Nifty of the National Stock Exchange too has registered a spectacular rise — are no doubt indicative of investor confidence. Only seven other benchmark indices of various countries — the list includes the Dow Jones 30 industrial index of the U.S., the Hang Seng of Hong Kong, and the Nikkei 225 of Japan — are trading in five digits. In an increasingly globalised environment, investors pour money into quality stocks only if they are traded through stock exchanges that meet stringent regulatory requirements. Among emerging markets, India has for some time been a hot favourite of large investors from across the world. More recently, investors from non-traditional countries such as Japan and Korea have come in. All this, seen together with the record-breaking run of the stock indices, would support an optimistic view of the Indian economy and its long term durability. Yet it has been amply proved that the unprecedented rise in the stock markets is due almost entirely to large institutional investors from abroad. While Indian mutual funds and other institutional investors are slowly emerging as a counterweight to the foreign investors, the fact remains that the small investors have largely remained on the sidelines. Recent Government and Reserve Bank of India statistics show that Indian households have a marked preference for physical assets over financial assets and even within the latter category share market instruments (equities and debentures) rank at the bottom.

Evidently, the relative non-participation of the retail investors is a reflection on the state of capital market reform. It also shows that at the present juncture of record stock prices the wealth effect, if any, from a rising market does not count for much. It might take a while to convince retail investors to be less risk averse. With the indices being where they are, this is hardly a propitious time for anyone to enter the market directly rather than through alternative routes such as mutual funds. Finally, from the perspective of the macroeconomy, do the high stock prices correlate with the recent good economic news? The Sensex and the Nifty have risen to their highest ever levels at a time when the news on the macroeconomy continues to be very positive. Almost all official forecasts have placed GDP growth for this year at around 8 per cent. There is no doubt that optimism on the economy is reflected in the stock prices. To judge the state of the economy and gauge the response to broad economic policies from the stock markets alone would be unwise. Read in conjunction with other indices, which are also positive, they provide a picture of an economy that is in good health and is moving ahead.

Printer friendly page  
Send this article to Friends by E-Mail

Stories in this Section

Markets at a historic high
Not as good as it can get
Geneva talks: not much scope for optimism
Moderate Islam has lost its voice
Why we love to hate our jobs
The Left in Latin America
Behind the transition in Karnataka
America's `long war' on terror
Deplorable
Vote against Iran
Speaker & courts
Sensex soars

Copyright © 2006, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu