Heady heights

A fortnight before companies start declaring their annual results for the latest quarter, the mood on the street is distinctively bullish. The Sensex has crossed 11,000 points, gaining 10 per cent in little more than a month, and the trailing 12-month price-earning ratio for Sensex stocks has crossed 20""signalling confidence in the coming quarterly numbers. Beyond the fundamentals, of course, there is the liquidity factor as money continues to flow into the market. Analysts have grown nervous, but all those who have expected a correction in the market have gone wrong in the past six months. These include bulge-bracket broking firms like Morgan Stanley, Merrill Lynch and Citigroup. In January, Societe Generale even thought the Indian equity market was a bubble. That may or may not be the case, but on the market today there is no fighting the deity of liquidity. If foreign institutional investors brought in Rs 47,500 crore in 2005, they have already invested a third as much so far in 2006, and it is not the end of the first quarter yet. On top of that, domestic mutual funds have collected over Rs 20,000 crore so far in 2006. Market players do not expect FII flows to ebb, and with domestic mutual funds having invested a net of no more than Rs 1,500 crore through 2006, they too are sitting on a cash pile.

It is not just the stock market that is blazing ahead. Ten-gramme gold at Rs 8,150 on Friday is inching back to its February high of Rs 8,175. Silver is at a new high of Rs 15,210 a kg, up 20 per cent from the beginning of 2006. Real estate prices across the country have hit new highs, with some numbers reaching dizzy and probably unsustainable heights. Prospective sellers have just to be patient, as waiting makes them money every month. And if the bull markets in these asset classes were not enough, the art market too has flared up, going by the recent Saffronart auction. Paintings that were going at Rs 12 lakh in 2004 sold at Rs 1.2 crore, and just a few weeks ago an Amrita Sher-gil painting found a buyer at Rs 6.9 crore. Look at any asset class, therefore, and it is evident that the country is witnessing wholesale asset price inflation. Banks may have a problem with liquidity, but a large category of investors is flush with money. It is obvious that money made in the stock market is being invested in works of art to adorn recently bought homes. The signs of over-heating are now clearly visible.

The party could stop if money flows out of the country for whatever reason (many Asian markets are now much cheaper than India), or if the money market tightens enough to slow down sales and spending. Certainly, real estate prices in most places have doubled in the past two years, and must take a breather sometime soon. Home and car loans have become more expensive, as banks have stepped up interest rates in stages, by a cumulative by 2-3 per cent. And if the corporate results for the March quarter prove to be disappointing for any reason, the mood could change. However, the sales of consumer softs are buoyant, capital order books are full to overflowing, and there is no shortage of investors who see an irresistible India story over the medium term. But Dresdner Kleinwort Wassestein's Albert Edwards, a votary of the bear story, points to "the rapidly widening current account deficits, excess portfolio inflows, high and rising inflation and a stock market that has risen by over double the rate of a buoyant emerging Asia." If the party goes on for much longer, expect the ranks of nervous investors to also grow.