Sucheta Dalal :Final call is the investor's (14 January 2002)
Sucheta Dalal

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Final call is the investor's (14 January 2002)  

Is the market headed into a strong bull run, or is it being talked up by a loose alliance of market operators, brokers and fund managers? This question is haunting seasoned investors and is causing petty speculators to rush into irrational trades. If you were to go by the fund managers and experts, the majority view is that stock prices are headed north, never mind that the pink papers are full of bearish signals that belie such optimism. Are the fund managers talking up the market with an eye to their battered Net Asset Values or to attract cash into their funds? Are they exaggerating the good news? Not entirely.

The main argument of the bull camp is that there is too much idle cash sloshing around and very few investment opportunities especially outside the stock markets. This money has to find its way into equities. On the other hand, the news seems continually bearish. Look at last week’s papers alone. Petrol and diesel prices were cut, but accompanied by a steep hike in excise duty on petro products; and oil companies argue that they would face cash flow problems in the immediate term. Also, the whole exercise is aimed at draining the oil pool account of around Rs 1,600-2,000 crore in order to bridge the fiscal deficit. This is certainly bad news.

On the growth front, the numbers for industrial production in November are frightening. The 7.4 per cent growth last year has dwindled to 0.9 per cent this year. But the bulls would argue that there are signs of revival in the capital goods sector. On the other hand, soft drink sales have dropped two per cent in 2001, and the Manufacturers Association of Information Technology has cut sales projections for PCs by 32 per cent. On the negative side again, fears of war escalated on Friday with the Chief of Army Staff holding an unprecedented media briefing to do some extremely tough talking, including the retaliatory use of nuclear weapons. He described the border situation as “extremely serious”. There is seldom anything more bearish than a war and the stock indices plummeted immediately, but recovered sharply on sustained buying from local financial institutions. The uncertainty, however, continues.

The bad news does not end there. Estimates of the US-64 bailout range from Rs 5,000 crore upwards and this does not include the possible payout of an estimated Rs 10,000 crore on its assured return schemes which are facing a deficit. These numbers are not small change, but more importantly, the government shows no signs of finding a permanent solution to the UTI problem. The finance minister is still in denial mode about the inevitable bailouts of banks (Indian bank and UCO bank), FIs (IDBI and possibly IFCI for the second time) and even Enron (the institutions have sought a bailout) so he offers no answers. Moody’s Investor Services has also echoed this worry by expressing concern about India’s public finances.

Dr Susan Thomas of the IGIDR writes about “how the government has kept every non-trivial bank on life support system, at the price of flouting principles of banking supervision”. She says that with total bank deposits at Rs 12 trillion, the one-time cost of rescuing the banking system, without imposing costs on depositors, would be a huge Rs 1 trillion. “If the government picks up the tab on this, it would severely hurt public finance, and the production of public goods in India”, she argues. The market ignores these warnings signs because they have no immediate bearing on stock prices.

Let’s look at the good news. Fund managers are bullish because of low interest rates, low and stable inflation, huge liquidity, a stable rupee, some good corporate results and what they claim are signs of a recovery. Backing this view is the fact that India continues to attract foreign investment. Cumulative FDI is reportedly set to cross $5 billion this calender year, foreign institutional investment has crossed Rs 13,000 crore and asset allocations are expected to be higher this year. This money is bound to find its way into the capital market and boost stock indices.

Yet, in real terms it is clear that the good news has to be hunted down with some effort. For instance, money raised through public sector disinvestment is paltry, but it is written down as a “commitment to reform”. GDP growth at 5.3 per cent (it may not reach this level) is well below the projection of 6.3 per cent of last year, but it is seen as respectable in a dismal international scenario. Fund managers say that “industry is poised for a cyclical upswing” and are banking on a sharp improvement in corporate earnings. But industrialists are largely pessimistic, admitting privately to serious worry about the lack of policy direction .

At the end of the day, the biggest bull factor seems to be foreign institutional investment, which allegedly finds India safer because its currency is not fully convertible and flight of capital far more difficult. Are these positive factors cited by the pundits a good enough basis for a bull run? The issue is how much do the pundits know? Let me end with one example. Alan M Newman wrote this on “On October 9, 2001, five Goldman Sachs analysts released a report citing Enron as “still the best of the best,” and “strongly” reiterated their recommendation, with the expectation that the shares would “recover dramatically in the coming months.” Earnings estimates for 2002 were cut to $2.15 and the price target was cut to $48, representing a 43.5 per cent improvement from the October 9th close of $33.45. Truth be told, we expect that even the finest analysis can sometimes go awry as expectations are dashed by the realities provided by time; as plans do not work out and as strategies backfire. But very rarely will we ever see misjudgments on this scale and proved within mere days of their positioning!” Newsman asks, “Is the onus only on those who are not painting the complete picture or is it also on those who are viewing it through rose-colored glasses?” The Enron share is now quoted at 65 cents! The investor has to make the final call, no matter what brokers, fund managers and operators collectively say.

-- Sucheta Dalal