The trends developing in the Indian stock markets throw up a distinct possibility of 2009-10 ending with the benchmark indicator, Sensex, close to the 20,000 mark. The last time it reached that level was almost two years ago on January 15, 2008, when it was 20,251.
In the course of mid afternoon trade, on Friday August 28, 2009 the Sensex reached 15,957 points. The index had gained 6.5 % in the last six days of trade. Yet how does that square up with the just 6% growth rate of the economy estimated for this fiscal. In 2008, when the Sensex reached 20,000, the GDP growth rate was 9% for 2007-08. More important, does this help push up capital inflow into the different sectors of the economy, which essentially is the primary responsibility of a stock market?
This is unlikely to happen. This, despite the current rate of growth, by far the most any economy will hope to log in 2009 or 2010. Also, it will not create too many new winners in the corporate score card. Companies in sectors which hit the updraft will squeeze growth by riding their massive backlog of inventories, but do not expect a jump fresh in investments in the current financial year. This is what the automobile companies are doing now. The CMIE database shows Rs 5.6 trillion of investment projects will be completed by companies in this financial year?more than twice that of last year. But markets evaluate companies on the basis of fresh projects announced rather than those already in the process.
Yet, riding on the expectations of the current growth rate, foreign and domestic investors are pouring fresh investments into the stock market. This is also being pushed by two factors. Of them, one is the rise in the exchange rate of rupee, helped paradoxically by an absolute fall in the growth rate of imports through the current year. This will lessen the trade deficit and also create a current account surplus. All of these are extremely plausible and have already begun to unfold.
The rise in the rupee against the dollar in the currency futures market is an indication of that. If the dollar continues to be weak through the rest of the year, FIIs are quite likely to abandon their safe harbour behaviour with the dollar and push up their investments in the emerging markets instead.
An Axis Bank report estimates that even using a base level hypothesis the inflow of FII money could touch $23 billion by March 2010. Just compare this with the net negative withdrawal of $14 billion in 2008-09 and the scale of difference between the two years becomes obvious.
Going by current values every 1,000 point rise in the Sensex means an additional market cap of $ 96 billion. So, going by the inflow of FII money and that of the domestic financial institutions, a move from this point towards anything above 19,000 is quite easy.
So, what gives? The money coming in will chase a very narrow band of stocks. This is the problem scenario. The safe behaviour is likely to persist in a global economy that still has to travel a long way towards recovery. The attraction of India and other emerging markets is not expected to evolve into a full blown belief in the equity of the companies beyond the first 200 in the NSE list.
This means while the investment to buy up the shares of Sensex, a group of the top 30 companies will shoot up along with the Nifty Fifty of the NSE, a large percentage of the rest 2,000 equities that figure in the daily trade could languish. The very high attraction of these stocks among all fund managers will push the Sensex. Remember the calculation basis of the index is the free float market cap of the 30 listed companies divided by the index divisor. So the higher the demand for these papers, the higher will be their price and consequently the value of the Sensex.
In the Indian economy, there is a strong urge to use the stock market barometer to get a sense of the way the economy is moving. But in March 2010, that would be quite disconnected. As an example the rise in the stock market as reflected in these two indices would happen at about the same time as the inflation rate measured by the wholesale price index would touch 5%.
To take advantage of the projected rise it will be a wise government that will unlock the value embedded in the chips of the public sector companies. These companies will rapidly add value to the market cap and bring in a larger universe of better quality stocks. None of the listed PSUs have done badly from the point of view of investors. Their presence will add depth to the market and create a much larger base of companies for the investors to choose from. This means the rise in Sensex will be less swift but better for the economy.
subhomoy.bhattacharjee@expressindia.com