Business

Put The Data In The Bubble

Is it the Modi wave? Is it the oil price crash? Whatever it is, the Sensex is soaring. But with little reform on the ground, is this another mirage?

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Put The Data In The Bubble
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The Reality

  • 12.79% Growth in corporate tax collection April-Dec ’14. Industry claims ease of doing business has improved under Modi.
  • 5,262 New corporate investment proposals have been announced, but project rollout rate has fallen. It’s still wait and watch.
  • 11% Banking credit flow to industry in October 2014 dipped, from 14.2 per cent  in April 2014
  • $16bn Indian markets are shallow- buoyed by FIIs, who have pumped in $16bn into equity in 2014. There are only 8mn or so retail investors.
  • 15 The past 22 years have witnessed pre-Budget stock rallies every year. Most financial experts feel investors should be cautious, the market is overheated.

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The chronicling of the Great Indian Stockmarket follows a fairly predictable pattern. To start with, there’s a big picture of that large building in Mumbai, with a gaggle of excited/anxious investors looking at a large TV screen with sharply dressed anchors spouting terms like ‘guidance’, ‘expectation’ and a perennial favourite, ‘rate cut’. Mat­ure readers of this magazine will rem­ember that some of these investors used to hold printed forms of a near-extinct form of lottery, dubbed IPOs, Initial Public Offerings. One usually ent­­ers that story with an anecdote about someone who has made/lost mil­l­ions in the stockmarket.

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The narrative then quotes a few experts (mostly men, some of whom are foreigners) who talk about how hot/depressed the Indian economy is given that China/Brazil/US/EU are in recession/recovering/booming. Finally, there are the usual caveats from personal finance experts about how investors should be careful investing in a systematic manner/not miss out on this opportunity. This story, we’re sorry to state, also has all these elements. But with one key difference (and we’re not talking about the man with the dark glasses).

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Seven years after then finance minister P. Chidambaram said the Sensex cro­ssing 18,000 worried him as “it is dri­­ven by copious flow of funds from a number of sources abroad”, we are loo­king at crossing 29,000. If that figure seems absurd, do consider that a 2010 SEBI study put the number of retail inv­estors in Indian markets at a piffling eight million. Now, the likes of Nomura, Citigroup and Morgan Stanley are forecasting the next target by Dec­ember at 33,500 this year. This comes a year-and-half after most international experts gave up on India as a failed story. Even cynical Dalal Street reporters are doing a double take: is this for real?

Most of the credit has been laid at the door of one man: Prime Minister Naren­dra Modi. The new government is being seen across the corporate sector as a big positive for business. Many market exp­erts credit the rise in Sensex from 20,200 in February last year to 29,000 last month to Modi’s leadership. “This is a welcome relief for business from the earlier regime, which was not only not friendly towards business but also hostile,” says Dhirendra Kumar, market analyst and CEO, Value Research. But is such sentiment the only reason behind the rally? Is the underlying economy strong enough to support these high valuations?

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Sure, sentiment matters. It is because of this that despite China and Japan and some emerging economies offering better investor environment, foreign institutional investors (FII) flow into India ($40 billion in 2014) has been good. What is encouraging is the fact that after years, FII investment in India is getting broadbased and is also being seen in mid-caps and small-caps and bonds which has not happened earlier. This is also because political and policy instability had dampened the spirits of foreign investors who were moving away from India.

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“Apart from moderating inflation, fundamentally there is nothing that has changed in India for the better.” Shankar Sharma, First Global 

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“On an average, I expect 20-25% returns comfortably. And in bright scenarios it can go up to 30% also.” Nirmal Jain, IIFL group

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“If FIIs can make money, why can’t retail investors? There is good money to be made in the markets over the next 12 months.” Surya Bhatia, Asset manager 

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“Investment plans indicate promoters are still awaiting clear-cut policy decisions from the current government.” Shashikant Hegde, Economic Research India

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“In recent months, stockmarket has done well but real estate has not. Realty investors are looking to park money in the markets.” Ashutosh Limaye, Head of research, JLL India 
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“Fundamentals don’t match bull run expectations—all sectors should be doing well and not just a few as of now.” Uma Shashikant, CIEL

Market pundits are largely of the view that while the NDA regime has indeed helped to raise sentiments, the biggest reason has been the 60 per cent fall in crude oil prices to around $48 per barrel since June last year. The drop in oil prices has eased inflationary pressures, leading the central bank to take the first step towards easing interest rates. The continuing slow growth in the US, Japan, China and the EU have all made India, with a higher interest rate, a booming stockmarket and a stable government an attractive destination. “Oil rules the world. Much of the current euphoria in the markets is because of falling oil prices,” says Girish Vanvari, partner and head of tax, KPMG India.

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Despite all these pluses, there are voices of “cautious optimism” and those striving to drive home the message that fundamentally nothing has changed as Modi has not found it easy to push through his promised reforms, be it in land acquisition or pro-corporate labour laws. “Announcement of new investments have gone up but the execution of projects has not risen. Uncertainty still prevails as the ordinance does not assure continuity of policy,” says Shashikant Hegde, director and editor, Economic Research India Pvt Ltd, who tracks project investments across the country.

Of course, a caveat here is that some big rate revision announcements are due in the US which could result in FII money flight from India to the US. Economist Abheek Barua, who’s a consultant with ICRIER, feels that there may be some initial hits like in May 2013, but most experts feel the Indian story is so “compelling” that it cannot be ignored. Also, that the Indian economy, unlike other economies, is not commodity-specific and sensitive to tank because of such hiccups.

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A clear dampener is the fact that retail investors are still not in the market. This is evident from the fact that the total mutual fund exposure in the last six months is just around Rs 60,000 crore. This is also because most small investors have burnt their fingers in the last few years when returns from the market have been minimal. Many experts feel small investors have diverted their money to real estate where prices have been rather static and it is a good time to buy.

But that story goes two ways. Resi­d­en­tial property sales have been flat since mid-2013, so much so the buzz in the metros is that prices may dip further. All that money is definitely looking for som­ewhere to go. Simon Rubinsohn, chief economist, RICS, says the commercial property market is more robust, but not residential. “A downturn in residential could indeed shift investor demand into other assets which may, in part, explain the recent stockmarket rise,” he says.

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Jaitley, Sitharaman on Budget Day last year. (Photograph by Sanjay Rawat)

Complicating matters is the recent revision in the GDP data (with a change in base year and inclusion of new global parameters) showing 6.9 per cent growth in 2013-14. This was otherwise thought to be a year of slow growth. The new data has raised a lot of questions with many in the industry continuing to be sceptical, maintaining that policy paralysis had indeed marked the twilight year of UPA-II’s tenure. “The new GDP shows there was indeed decent growth in the last year if the corporate data is included. I don’t see why anybody should doubt the concept, at least now,” defends Prof N.R. Bhanumurthy of NIPFP.

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Based on the new methodology, a better set of numbers based on the last three years’ trend, is expected to come out with the government’s growth projections next week. Will it, together with the forthcoming budget, work to attract even more foreign investors? Markets typically go up before the budget. “The market sentiment is ahead of the reforms,” warns Andrew Holland, CEO of Ambit Investment Advisors.

Uma Shashikant of the Centre for Inv­estment Education and Learning agrees, pointing out that despite market sentiments, the fundamentals don’t match the bull run expectations. She warns that markets are not moved by information or fundamentals alone but by liquidity. For India, the peak equity flow is considered around $25-30 billion. Projections are that this will go up to $40-50 billion. Of course, this may or may not happen.

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Despite it being “the same”, every market rally is driven by different global and local factors. Every time it happens, a small pool of Indian private investors, different each time perhaps, tries to ride the wave. And often fails. “People get attracted but they don’t understand the risks involved. The tide goes up, the boat goes up. Even if the stock is bad, its value goes up at such times. A new investor often does not understand that,” says Ranjan Varma, personal finance expert who organises several seminars for retail investors as part of the Consumer Guidance Society of India.

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Over the next few weeks, we will see plenty of action, with the government expected to push through more stock dilution in major public sector companies even as the first lot of coal blocks auction takes place followed by the spe­ctrum auction. Does all of this imp­r­ess Nandini Rane, a retired businesswo­man, who had invested long before the current upswing? “Overall, the markets have done well in the past year. But I’m not sure if one should invest now or rather offload some. I also see that the companies based in Gujarat are doing very well,” she says. And then, almost wistfully, she adds, “It seems the good times will continue for some more time.” A statutory warning is a fitting way to end this fairytale stockmarket story.

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By Lola Nayar and Arindam Mukherjee with Prachi Pinglay-Plumber and Pragya Singh

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