Stock exchanges must be the only place in the country where no one minds the role of a “foreign hand”. The reasons are obvious: foreign institutional investors (FIIs) played a stellar role in driving the markets to a new high by pumping in over Rs 130,000 crore, the highest ever, in Samvat 2066. With uncertainties high in most key global economies, FIIs had fewer options to choose from and rushed money to robust emerging markets like India which had a strong domestic growth story. While it’s anybody’s guess how long this horsepower of money supply would last, the near-consensus is that the party will continue well into the new year. There are several reasons for this.
A Reuters analysis shows it’s been more than 10 quarters since several economies, particularly the US and Europe, have been struggling, while the Indian corporate sector earnings continue to show consistent growth. The latest quantitative measures announced by the US Federal Reserve should help sustain FII flows into India, at least till the US economy shows distinct signs of a turnaround, and that appears unlikely in the immediate future. The even better news is that this time the rise in the markets has been very selective, purely based on financial performance of sectors or companies. This is unlike an arbitrary speculative rise one has often seen in the past. For example, consumption-based businesses have done well, thanks to tax breaks and more money in the hands of the consumer. That explains why the BSE Consumer Durable and Auto indices have delivered 50-80 per cent returns since the start of 2065 Samvat, helping them emerge the first and second best gainers, respectively, among sectoral indices. The markets were swift enough to reward companies that reported turnaround — Tata Motors, Hindalco, Tata Steel and State Bank of India are shining examples of this.
These are all good news. But the tough part is that some investors may judge the recent gains as excessive relative to the earnings outlook and choose to take some money off the table. This by itself isn’t bad as a correction will give some valuation comfort to investors. In any case, there is no reason for undue alarm. The Sensex at 21,000 in January 2008 was at 25.2 times 2007-08 earnings. In November 2010 when the benchmark index is almost back to that level, it is around 19.6 times 2010-11 earnings.
The real big question mark is whether retail investors, who have by and large remained absent in this rally, will come back to the market. Most skipped the secondary markets as the memory of what happened after January 2008 has still not faded. And those who wanted to get back through the primary market in the recent rally didn’t have an encouraging experience. Though 60-odd companies are waiting to raise around Rs 1 lakh crore, the track record hasn’t exactly been the stuff that would fire retail investors’ imagination. Of the 40-odd public issues in this financial year so far, only 15 gave investors good returns while others either gave negative or single-digit returns. But all that could change with the extraordinary listing of the Coal India issue, which showed that retail participation will come if an issue is reasonably priced and the issuers’ fundamentals are reasonably good. So, issues like Power Grid or Indian Oil or ONGC should see huge investor participation. For retail investors, nothing has really changed as it’s all about basics: if they don’t invest a rupee more than what their risk appetite allows them to do, they will have no reason to worry about the movement of the Sensex.
