Even as I sit down to write this column, the TV headlines are screaming about the continuing surge in the Sensex. The benchmark index has just crossed the crucial 4,400 mark in a rally that shows no signs of a let-up. It?s after ages that the markets have witnessed such a strong surge which, despite the twin blasts in Mumbai, refused to lose steam and continues unabated.
Most agree that this time, the rally is rooted in strong fundamentals and a leading investment banker I met the other day was even raving about how, at this level of Sensex, the price-earnings ratios have never been this low and, therefore, this attractive. This clearly means that the market still has quite a lot of steam left. Why is this time?s rally more solid than other times? Quite simply, because there are enough genuinely good things happening in the economy for the barometer ? the Sensex ? to head north. Consider some facts.
This time round, the rally is not fuelled by just a clutch of technology companies, but is an all-round rally where the traditional economy (I refuse to call it the Old Economy anymore) corporations are participating and, on most days, leading from the front. This is backed by sound performances. Sectors like steel, auto ancilliaries, textiles and banks are being wooed by the market, with good reason. Most companies have completed their restructuring efforts and demand is picking up, where their unutilised capacities are now being used up. Investment bankers even reckon that soon, some of the companies may begin tapping the capital market for funds as expansion plans are drawn up. Banks are doing well, with the Securitisation Act providing them the much-needed boost in getting errant borrowers to fall in line. The RBI has recently made it clear that its earlier growth projection of 6 per cent may be ?exceeded significantly?, and the monsoon has been very healthy this year.
Great news. But, lurking behind this celebration of the return of the good times is another factor. With the return of bullishness, most often returns the speculator, whose unbridled greed can often wreak havoc on unsuspecting markets. This has begun happening. Quietly, but surely. A list of 89 Z category stocks, mostly penny stocks, compiled by the FE Research Bureau, shows an average increase of 61.34 per cent between the closing prices on April 30, 2003 and September 5, 2003, with some of the stocks registering increases of anywhere between 200 per cent to 600 per cent during this period. The names of some of these? Shreeji Phosphate, Somani Cement, Transgene Biotek, Western India Shipyard…the list goes on and on. These 89 stocks have shot up on an average by over 61 per cent when, during the same period, the Sensex rose by 48 per cent, and the Nifty by 49.71 per cent. Clearly, factors other than mere bullishness seem to be at work.
Indian markets have a penchant for falling victim to scams which ride on bull runs and then cause havoc on the unsuspecting small investor. Typically, when a rally acquires the dimensions this rally has, the smaller investors will be tempted to invest in stocks which are within his affordable range ? and penny stocks fit the bill perfectly. It, therefore, becomes very easy for the speculator-scamster to take advantage of this sentiment, ramp up these stocks, and then make a quick getaway, leaving the small investor with burnt fingers. Yes, it is easy to argue that investors should be careful, they should curb their greed, but in a country like India and a market starved for years of good times, chances of a scam are that much higher.
Am I being alarmist? No. Because recently, the stock exchanges, realising this obvious danger, have also slapped special margins on a number of stocks and even removed several of them to the Z category as a warning to investors. Signal enough for investors to be careful and not fritter away a perfectly sound bull run to the altar of greed. The market regulator Sebi is doing its bit too, and issuing warnings and keeping checks. But ultimately, it is the investor alone who will have to show restraint and not fall prey to these speculators. In the cult movie Wall Street, scamster Gordon Gekko said ?Greed is good.? But that?s only in the movies. Reality is altogether another matter.