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Wednesday, Feb 11, 2004

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Beware the market buzz

Raman K. Agrawalla

THE buzz on the street is that this time the stock market rally is different. It is broad based and not confined to any specific sector. Some analysts argue that this is an authentic bull run and not at all a bubble.

Yet, the small, retail, ordinary Indian investor not to venture into the market at such a high valuation when the Sensex is within sight of the 6000 mark.

Though the performance of Indian Inc has been encouraging and the economy is taking a turn for better, the so-called `feel good factor' is highly oversold. Notwithstanding all hype about "India shining", small investors would be better being cautious and not swayed by the gung-ho spirit. Look beneath the surface and there are enough reasons to hold the urge to buy into the market at this time.

Just compare the current price of the scrip one intends to buy with their prices four-five months ago; you do not need to be an expert or an analyst to see that the stock have already appreciated four-five fold. Even through the discounted cash flow approach it is very difficult to defend such a high valuation except in case of a few scrips. Going by recent news item in financial dailies, even the UTI is liquidating most of its mid-cap holdings. What especially the small investors should not do now is to get into any of the newly-launched sectoral or other mutual fund schemes.

As their money will be used to buy scrips at a very high price. For instance, even when the Sensex is on a high, the NAVs of quite a few sectoral funds, especially with technology orientation, are well below their face value, after even tow-three years of holding.

The market appears to have factored in all the positives and the scope of any further significant upside is limited. On the contrary, the negatives are yet to be factored in. With general elections round the corner, parties will resort to competitive populism. This can strain the already weak fiscal situation. Furthermore, the reports of some agencies that the economy is on high-growth path is to be seen in the backdrop of the low base last year.

A significant contributor to this year's growth has been the agricultural sector performance on the back of a good monsoon; last year farm sector growth was in negative. Agriculture, and the economy, is yet subject to the vagaries of nature and one cannot be very optimistic about the monsoon this year.

Second, while a significant step has been taken towards ending India-Pakistan hostilities, the peace process is still to work itself out, and thereby hangs uncertainty for the market.

Third, it is argued that foreign institutional investors are confident of the Indian market, reflected by a record $7 billion FII inflow in 2003. However, the FIIs, the real driver of the recent rally in the Indian stock market, are in India not so much because of "pull factors" as due to "push factors". These "fair-weather friends", as described by Dr L. C. Gupta of the Society for Capital Market Research and Development (SCMRD), are pushed by recessionary conditions in the developed markets and the very low interest rate in the US. With turnaround in the developed financial markets and economies, the FIIs are likely exit as fast as they came in. The Indian stock market may not have the depth to absorb such a shock and the subsequent sentimental herd behaviour.

The market is now in an uncharted territory. Hopefully, no scam or scandal is brewing. True, the Securities and Exchange Board of India is more proactive and watchful than ever before.

Still, the record of corporate governance and regulation in India is not something to be proud of, yet. Many question the timing of the recent "margin trading" announcement by SEBI. In fact, the market was in need of such a measure. But its announcement in a bull phase can fuel further the already high speculation in the market even if investors now have to part with more money to hold positions.

Further, investors should not forget the 1989 experience of Japanese stock market when share prices spurted 30 per cent in four months, only for the bubble to burst. Even the investor frenzy in the Indian stock market during 2000 IT boom that went bust is quite instructive.

There is a consensus among the observers of the stock market that the retail investor has remained out of the recent rally, except for those whofound an opportunity to liquidate their holdings purchased in the earlier bull run. This is good because the upside from now is limited despite operators, brokers and fund managers expecting the Sensex to touch 8000 sooner or later; what lies ahead is a major correction, if not a slide. Therefore, it is time to wait-and-watch for a couple of months.

(The author is Senior Research Associate, Society for Capital Market Research and Development, Delhi.)

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