KOLKATA - As India's benchmark Sensex, the
30-share stock-market index instituted by the
Bombay Stock Exchange (BSE), hit the "momentous"
10,000-point mark on Monday and went past it over
the next two days amid screaming newspaper
headlines and rejoicing TV anchors wearing
T-shirts and headbands with "10,000" written
across them, reactions varied wildly.
Some
said the market was overheated; some said, "You
ain't seen nothing yet." Others said passing the
magic number was a
landmark in the history of
India's 130-year-old stock market. The finance
minister said, "What's the big deal? It is just a
number." On one point, though, there was general
agreement: India has finally arrived as an asset
class for global investors.
The Sensex
crossed the coveted 10,000-point mark during the
late trading hours on Monday for the first time in
the 20 years since the Sensex was constituted by
the BSE, and although it slipped a bit at closing
that day, it surged ahead by more than 100 points
the next day to scale a new lifetime high of
10,099.58. The broader NSE-Nifty of the National
Stock Exchange too scaled a new lifetime high of
3,025.10 on Tuesday.
With this record,
India is now a member of the elite club of indices
that are trading in five digits and more. These
are the Dow Jones 30 Industrial Average of the
United States, the S&P TSX Composite of
Toronto, Canada, the Nikkei-225 of Japan, the Hang
Seng of Hong Kong, the IPC of Mexico, the Bovespa
of Sao Paulo, Brazil, and the MTBTEL index of
Milan, Italy.
"The most interesting aspect
of this event is that India is now recognized an
asset class by global investors," said Hong
Kong-based Marc Faber, the international
commentator and contrarian investment guru, as
local experts added that the Indian stock market
has turned out to be an "ideal place of
investment".
"Ideal" is debatable, but
what is certain is that after more than 14 years
of economic liberalization and reform, a period
that was most tumultuous for its stock markets as
well, India has finally emerged as a "discovered"
investment destination among global fund managers
and investors. For although there's no single
driver of the Sensex's rally to the 10K mark, it
can't be denied that foreign institutional
investors (FIIs) have been the prime movers. For
instance, during the run from 9,000 to 10,000 over
the past 10 weeks or so, FIIs pumped more than
US$3 billion into the market. During the whole of
2005, which saw many record peaks too, FII inflows
were a record $10.7 billion, and are at more than
$1 billion this year.
"It's like
Christopher Columbus has finally discovered
India," said Uday Kotak, the vice chairman of
Kotak Mahindra Bank, one of India's leading
private institutional investors.
The
road to 10,000 Indeed, if one had to tell
just one story about India to portray the
country's apparent economic success story, one
would probably describe the stock market. But
although the Indian stock market has been around
for a startling 130 years, tracing its origins to
the formation of the Native Share and Stock
Brokers Association in 1875 - making it one of the
world's oldest - stock trading was hardly a story
worth writing home about until about 1985, when
the Sensex was created, using 1979 as a base year
defined as 100 points.
During 1980 and
again in 1985, the Sensex perked up a bit, but it
got its first real shot in the arm in 1991, when
finance minister Manmohan Singh, now the prime
minister, unveiled the government's first set of
economic reforms. The Sensex reacted by breaching
1,000 points, considered a landmark then. But then
in 1992, an infamous securities scam erupted,
caused by rogue broker Harshad Mehta, who
illegally siphoned off billions in bank money to
prop up stock prices.
Despite being the
"father of India's reforms process", Manmohan did
not become as popular as his successor, P
Chidambaram - who is also the current finance
minister. Chidambaram's 1997-98 "dream budget",
which introduced a series of incentives for the
capital market - such as share buybacks and tax
breaks for investments in equities - sent the
market to dizzying heights, making him a "darling
of the markets". The Sensex during that budget
session saw its biggest jump in two decades,
reaching 4,305.8 by July 1997.
But this
was followed by another turbulent period for the
market. The first blow came in the form of the
defeat of the Congress government, to be replaced
by the nationalist BJP-led government with
Yashwant Sinha as Finance Minister. The Sensex
reacted by nose-diving after Sinha presented the
first "Swadeshi" (literally national) budget in
1998-99.
In 2000, driven by the dotcom
boom, the Sensex charged up again, to reach 5447
points in February 2000, but that too fizzled out
soon with Sinha's proposed distribution tax on
dividends in his 2000-01 budget. And although
Sinha reversed that "market unfriendly" proposal
in 2001-02, the Sensex was hit severely by yet
another stock fiasco, this time triggered by
broker Ketan Parekh. Parekh caused the Sensex to
crash to 1996 levels in July 2002, which also
forced the removal of Sinha as the Finance
Minister.
Sinha's successor, Jaswant Singh
did manage to bring in a "feel-good factor" into
the markets subsequently, which lifted the Sensex
to 4300 in September 2003; however, that, too, was
short-lived as the Bharatiya Janata Party-led
National Democratic Alliance (NDA) government
unexpectedly lost the 2004 polls to the current
United Progressive Alliance (UPA) government,
which brought Manmohan Singh and P Chidambaram
back to the helm, as prime minister and finance
minister respectively.
On May 17, 2004,
now referred to as "Black Monday" - the day poll
results announced the defeat of the NDA
government, the Sensex experienced its
second-largest ever fall of 565 points, after the
largest ever intraday fall of 800 points - in the
most volatile trading day yet seen. The BSE
suspended trading twice during the first half of
the session in a bid to soften the damage.
Chidambaram's first budget under the UPA
fold - two months after the May 17 crash - did
bring some relief to market sentiment by slashing
taxes a bit, but his second budget, which cut
taxes and boosted spending on infrastructure, sent
markets soaring. The Sensex has not looked back
since.
What next? Nevertheless,
now that the Sensex has breached the 10K mark, the
important question is, can it sustain that level?
Many are cautious.
"I think it's an issue
of valuation," said Adrian Mowat of JPMorgan, a
major FII. "If you take the forward [2007]
valuation of India, its stocks are [selling] at a
price-to-earnings multiple of 16.8, whereas the
weighted average forward valuation of China,
Brazil and Russia is 11. So what we are finding is
that those who have the money to put in emerging
markets are setting aside lesser amounts for India
because valuations elsewhere are more compelling."
Andy Kie, a Singapore-based analyst with
Morgan Stanley, is even a little scared. "The
markets have entered uncharted territory and we
have seen a lot of speculative buying from people
who do not know much about emerging markets. The
markets are overheated," he said.
Yet,
"You have seen nothing yet," said Rakesh
Jhunjhunwala, regarded as the most successful
individual stock-market investor these days, who
runs his own multibillion-rupee investment
company.
Mihir Vora, head of equities at
ABN Amro Mutual Funds, feels that the bull run is
not over quite yet. He said that considering the
fact the Indian economy is on a sustainable growth
path of 7-8% a year, and that corporate earnings
growth is excepted to be normal with some
companies and sectors still promising
significantly higher growth rates, "valuations are
not in a zone that can be called euphoric or
irrational".
Jhunjhunwala and his ilk also
argue that the Sensex's new peak and a gross
domestic product growth forecast of more than 8%
are driving FIIs to rush in with more funds,
regardless of the "expensive tag that many may
prefer to attach to the Indian markets".
For instance, on Monday, the day the
Sensex hit 10K, the FIIs were net buyers to the
extent of $175 million (a trend brokers say has
continued until Wednesday, even as the Sensex has
slipped a bit because of profit-taking). They add
that an increasing number of foreign investors -
including JPMorgan, AIG Lazard, CSFB and Goldman
Sachs - who had earlier exited India have firmed
up plans to enter the asset-management space (ie,
mutual-funds market) already.
This is
because, said Vora, "Indian valuations may look
high compared to other emerging markets but India
has been a star performer, both in terms of
returns and in attracting fund flows."
And
according to maverick investor Marc Faber,
although the Indian stock market has grown three
times since 1999, in dollar terms it has grown
only 30%. "The valuations are expensive but still
attractive when compared [with the] S&P 500,"
he said, adding: "If someone [held] a gun [to] my
head and [told] me to choose between [the] US and
India, I would choose Indian real estate and
equities."
Indrajit Basu is a
Kolkata-based equity analyst turned journalist
with more than 12 years of experience in
business/finance and technology journalism.
Besides writing for Asia Times Online, he also
writes for US-based publications, as well as IT
companies.
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