Is all well with this bull-run?

GUEST COLUMN/ TORCH-LIGHT

FIIs find merit in positioning India as an alternative investment destination to China.

The ongoing bull run at the Indian bourses has left even the most optimistic investors dumfounded. To get a holistic view, one must traverse back in time to May 17, 2004, known infamously as 'Black Monday'. To start with, the relatively large number of electoral seats won by the Left parties in the general elections of 2004 had unnerved the capital market.

The initial adverse pronouncements of the Leftist leaders on India's economic reform programme seemed to confirm the worst fears of marketmen. In a knee-jerk reaction, the bell-weather BSE Sensex (Sensitive Index of the Bombay Stock Exchange) nosedived and shed 1000 odd points intra-day to stand reduced from 5200 points to around 4200 points. With the passage of time, it became evident to market participants that the bark of the Leftists was far worse than their bite.

Amid all this confusion, most people failed to grasp the long-term impact of a far-reaching pronouncement in the Budget presented by finance minister P Chidambaram during the second half of 2004.

It made India one of a few countries worldwide to exempt capital-gains tax on shares and securities held for 12 months or more and levy a marginal 10 per cent tax for holdings of a lesser period. These tax-breaks made equities the most attractive asset class for investment in India.

It also coincided with a time when the Indian corporate sector had not only learnt to survive the onslaught of foreign competition but to thrive. Against the backdrop of an excellent monsoon in 2003 and a normal monsoon in 2004, the Indian economy was on an upswing.

At a time when most economies were struggling, the Indian economy displayed the ability and potential to sustain a 6 per cent GDP growth per annum. Furthermore, whereas companies across Asia are struggling to maintain corporate earnings, several corporates in India are comfortably recording a 25-30 per cent growth rate. In terms of purchasing power parity (PPP), India currently ranks fourth in the global market.

With the economy on a roll, large infrastructure projects have taken off, resulting in a multiplier beneficial effect not only across related sectors like steel, construction and banking but also a host of other sectors. The increase in construction activity across India and the surge in real estate prices clearly reflect an economy on a roll.

Similarly, outsourcing, a word that had hitherto been associated only with the Indian IT sector, suddenly found resonance across several other sectors like auto-ancillaries, pharmaceuticals and even media (animation) to name a few. The sharp reduction in the demographic age profile of Indians with disposable incomes is yet another positive that is expected to drive economic growth.

All this is perhaps what first caught the eye of foreign institutional investors (FIIs) who suddenly found merit in positioning India as an alternative investment destination to China. What followed thereafter was an unprecedented inflow of foreign funds into India.

This fueled the Indian stock markets and there was no looking back thereafter. The bell-weather BSE Sensex not only broke the previous all-time of 6200 odd points but rolled on, juggernaut like, to stand within striking range of the 8000 points level. The sharp upswing of 1600 odd points over just 14 weeks has been attributed in market circles to the advent of the Japanese FIIs into the Indian market.

Given the dismal interest rate scenario in Japan and their historic antipathy to China, they seem to have found the booming Indian economy extremely attractive. And, of course, Indian equity market participants are hardly complaining as their aggressive buying provided yet another boost to the ongoing bull run.

It is noteworthy that the profile of investors at domestic bourses has changed significantly. The increasingly dominant investors are FIIs, followed by domestic financial institutions and mutual funds. Although retail investors continue to be occasionally drawn into nibbling at stocks, they no longer have even a marginal bearing on fortunes at the bourses.

With the dice heavily loaded in favour of FIIs, it will require two or three of them to lose their nerve at a particular point and sell simultaneously to precipitate any serious fall.

Now, all this sounds extremely promising and from the looks of it, a seemingly unending party appears to be on at the Indian bourses. But before signing off, here are half a dozen posers:

Does the economy have the ability to sustain the same growth rate in the event of a poor monsoon next year?

How wise is it to ignore the fact that fact that crude oil prices have topped $60 a barrel during off-season?

How wise is it to comfort oneself saying the market P/E is half of what it was in Y2K when there were IT stocks quoting at three-digit P/Es, exaggerating the average?

Are all cyclical industries really on the right side of the growth curve?

Can long-term investors afford to ignore the widening class divide and its potential repercussions in a rapidly growing economy?

Last but not the least, is there any credence to the rumour doing the rounds that most of the past 'scamsters' are back in action at the bourses?

(The author heads Lotus Knowlwealth, Mumbai, and can be contacted at ceolotus@hotmail.com. Disclosure: He has no outstanding interest in the shares of the companies discussed here.)