Retail suckers rushing in?  

November 10, 2003

Typical of every bull run, the retail investors can't wait to get in, after the Sensex crossed 5000. Will they end up holding the baby again? This column appeared in the Divya Bhaskar in Gujarati.

By Sucheta Dalal

After some dithering and minor corrections, the BSE Sensex scaled past the 5000 mark with the élan of a top-flight athlete.  Naturally enough, punters now have their sights fixed on the 6000 mark, or if some technical analysts are to be believed 7400.

Their expectations are accompanied by a torrent of good news and such a positive ratification about India’s economic future by international economists that even diehard cynics have turned believers. Everybody now wants a part of the stock market action; especially retail investors who don’t want to spend any time studying the market, understanding stocks or tracking trends.

A broker friend tells me of his newfound popularity.  When he goes for his morning walks at Borivili, fellow walkers have begun to come over and introduce themselves to him. Friends who haven’t been out of touch for decades are finding his telephone number and turning nostalgic. All of them have one objective– they know that his firm specialises in derivatives trading and have ‘heard’ that it is the easiest way to make quick money in the stock market with the lowest investment and risk. So, they want him to invest their money in the market.

Why would people trust their money to someone who is almost a complete stranger? The answer is greed and laziness. A bull market is better than gambling, because you expect and demand that you win every time. And they want their broker to invest their money, manage risk and provide high returns for the price of his brokerage and maybe a little more. Unfortunately, brokers often succumb to the temptation of taking their money and promise fanciful returns. But all this fizzles out when the bull run ends. 

This doesn’t mean that I am predicting an immediate end to the rally. Far from it. India has indeed become one of the world’s most glamorous investment destinations. And this time, the hype has been created by global investors who have pumped money into our markets at the rate of nearly Rs 500 crore (net) everyday.

Investment in India has received another major fillip with what has been called the Goldman Sach’s BRIC report.

Essentially, Goldman Sachs, a reputed international investment firm, has predicted that in the next 50 years the economic development in four countries-- Brazil, Russia, India and China (BRIC)-- will outstrip the current crop of developed nations. It predicts that BRIC will overtake the G-6 nations of U.S., France, Britain, Germany, Japan and Italy.

As heart-warming as the report is, it glosses over the political shenanigans that hold back nations of this region. But the details don’t matter. The report has created as much excitement about India as there was in the early 1990s when P.V.Narasimha Rao and Dr.Manmohan Singh pushed the liberalisation programme and freed development.

There is similar euphoria on the Information Technology front too.  For instance, British writer George Monbiot, in an extremely well researched article titled “The Flight to India” talks about the reversal of the East India Company situation where England had suppressed Indian manufacturing capabilities and stripped our raw material to gradually push India into backwardness.

“Now the jobs we stole 300 years ago are returning to India”, writes Monbiot and he backs it up with some stunning statistics. For instance, he says Hong Kong Bank, British Airways, British Telecom, Lloyds TSB, Prudential, Standard Chartered, Norwich Union, BUPA, Reuters, Abbey National and Powergen have already begun to move their call centres to India. He quotes a report in the Evening Standard of U.K., which published confidential documents saying that at least 30,000 executive positions in Britain's finance and insurance industries are likely to be transferred to India over the next five years. He also cites the prediction by American consultants Forrester Research that the US will lose 3.3 million white-collar jobs between now and 2015. Most of them will go to India.

Although call centre employment provides low-end job opportunities overseas, it means good salaries and entry-level employment for Indians. For the first time, the Free Trade agreements are working in our favour and not against us.

But all this good news must be remembered in the context of the basic fact that India’s market has already seen a sharp rise. And on four days last week, the BSE sensex rose at an outrageous 100 points a day, which is dangerous.

More importantly, it must be remembered that international investment consultants were as bullish about Brazil before its currency collapsed and were totally sold on South East Asia before it crashed. In both those cases, the foreigners did lose heavily, but the economies also crumbled. 

Investors who come into the capital market today must remember that the pace of this bull run is completely unsustainable. And if they let themselves be blinded by the images of a “shining India’, they could end up losing money and providing exit opportunities to the very foreigners who powered his bull run.