Sucheta Dalal :The fate of India's bull market
Sucheta Dalal

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The fate of India's bull market  

May 22, 2006

After the bloodbath on our bourses, several foreign investors have reiterated their ‘bullishness’ about India in the long run and welcomed what they call a long overdue correction. What does this mean? How long-term is long-term bullishness? The answer really depends on the global situation. But it is always easy to be bullish about India, if one takes a sufficiently long-term perspective. For instance, here is one view that I read on May 17, in The Daily Reckoning, a respected investment e-letter. It said, the “Bombay Index is up 300% in the last three years and major funds have gained 80% in the last 12 months...Is this the beginning or the end?”


Its answer: “The rise of the Indian stock market is part of a trend that probably has another 50 years to run—maybe 100 years. India is poor. Western Europe and America are rich. This disequilibrium arose only in the last 300 years. Before that, the average working man on the banks of the Ganges earned about as much per day as the man on the banks of the Thames or the Potomac. Our guess is that today’s great disparity is fleeting rather than permanent.” By this perspective, we are all bullish, except for the niggling fear that policymakers could play spoilsport.


The same newsletter, on the same day, said that US markets were at a “danger level,” a sort of “economic Code Red” that would see billions of dollars shift from equity to other asset classes such as oil or gold.


Clearly, the near-term outlook re-mains extremely worrying, even without the Central Board of Direct Taxes exacerbating the situation. Tax officials claim that they will decide whether a person is an investor or a trader (based on a menu of considerations) and will also dictate what portion of a person’s portfolio will be allowed as investment (eligible for long-term and short-term capital gains treatment), and how much of it will be treated as business income taxable at the highest rate. This issue will apply to domestic inves-tors as well as to foreign institu-tional investors (FIIs) and is equally unsettling for both. It is time that the finance ministry removes all ambiguity re-garding taxation of capital market investment, because it is intrinsically extremely sensitive and cannot possibly have a wide variation in tax implication depending on the assessment of individual officials.


Keeping aside this potentially volatile issue for the moment, let us look at how global market movements can be expected to impact domestic trading. With the US Fed rate touching 5% and increased volatility in currency, commodities and equity markets, the global situation is tough. Gold and oil prices have both declined last week, there is already a rebound in US treasuries and the dollar. Domestic mutual fund investors in the US, as well as hedge, funds are reportedly booking profits and moving into cash. All this could impact portfolio flows to emerging markets such as India in the near term, even though overall sentiment remains bullish.


• It’s easy to be bullish on India in the long term; the near term is worrying

• The big boys of global finance are nervous at the huge rise in volatility

• Some feel a bear phase is due in the US market, but others see a rebound soon


What is especially worrying is that the big boys of finance are ‘nervous’ at the massive increase in global volatility over the past week. They are voicing their views in various investment groups and newsletters. One of these says that gross positions across all asset classes—commo-dities, equity and currencies—are being unwound. A top fund manager points out that although leading US stock indices closed modestly up on Friday, the eight-day straight run of negative returns had happened for the first time in the past five years. “Does this portend a sustained decline of Nasdaq,” he asks. This question alone is enough to worry emerging markets like ours, where the three-year bull market has been propelled largely by global interest in our companies and stocks.


Carla Mozee of quotes Paul Desmond, president of Lowry Research in North Palm Beach, Florida, saying, “We think we are on the verge of a bear market.” He reportedly said that “every four years since 1949, the market has hit a major bottom to mark the end of a bull run, the last major market bottom being in 2002.”


She also quotes a Standard & Poor’s analyst note to its clients which points out that the S&P 500 “has sliced through quite a number of key short-term and intermediate-term technical supports like a hot knife through butter,” including falls “right through its 50-day, 65-day and 80-day exponential moving averages, [as well as] its 150-day [and] 200-day exponential averages for the first time since October 5.” The S&P analyst reportedly “expects an intermediate-term bottom in the next week or two...followed by snapback rally that could last throughout the summer.”


However, there is equally strong opinion that the US market is also in the middle of a bull market correction and will rebound smartly next week. The fate of emerging markets will be impacted by how these contradictory predictions play out. If American markets turn bearish, portfolio flows to emerging markets that offer better returns could increase. Or, global investors, especially retirement and pension funds, could turn conservative and prefer to stay at home, especially as US treasury rates now offer a decent return. The fate of India’s bull market will depend on whether the money that is waiting to enter at every fall is still there or has vanished.





-- Sucheta Dalal