A Li'L Elevator Music

The irony is striking: when the country had a valid government, the bourses were struggling to trot. And now when the government is a mere caretaker, the stockmarkets are flying like Pegasus. In the one month since the Jayalalitha quake rocked the Vajpayee government, the Bombay Stock Exchange Sensitive Index (Sensex) has jumped almost 25 per cent, a gain of nearly 1,000 points. Says Singapore-based Sameer Arora, in charge of Asian emerging markets at Alliance Capital: 'In a way, it's good that there is no government. In fact, if there were a government, I don't think the market would have taken off like this. Each evening, the markets would have debated what's going to happen at the Centre. Now till the elections, everyone's sure nothing much is going to happen.' Adds K.R. Bharat, managing-director, Credit Suisse First Boston (India) Securities, 'India's biggest enemy is India itself. Whenever things are on an even track, the country finds something to pull itself back. Indeed, absence of a valid government at the Centre is the best news for the markets in a long while.'

In the past couple of months, half-a-billion dollars have come into the Indian bourses. Not even in '96, when the fii inflows were a record $3.05 billion, did the markets witness this kind of a bull run. The other interesting aspect is that while FIIs have made money on this rally, local operators have been caught napping. Previously, local operators would warehouse stocks and ramp up prices well ahead of the foreign funds, who would be compelled to buy at a higher price. The local brokers didn't count on the sustainability of the rally this time.

Says Bharat: 'The FIIs have completely outwitted local operators. In fact, operators have lost money both ways. Immediately after the government fell, they liquidated their positions which had been built up on the hope that the government would survive. Not expecting the FIIs to buy aggressively, they continued to sell.'

Explains U.R. Bhat, chief investment officer with Jardine Fleming India Asset Management: 'At 11,000 points, the Dow is peaking out. New opportunities in Asia have shifted the global fund manager's attention to this region. It is also timed very well with the resurgence of Asian economies.' Adds Bharat: 'Most Southeast Asian countries have started recovering, so markets all over this region have been bouncing.'

Arora of Alliance agrees. Says he: 'Most funds are getting what was coming their way. Because bourses across Asia have been performing well, they have got a huge allocation. Earlier India was rather underweight. Now the country is getting its fair share.'

The current fii inflow is focused on commodity stocks which have been ignored for the past couple of years. In contrast, select pharmaceutical and software stocks - the darlings of the markets till just a fortnight ago - have lost ground. In fact, an upward movement was visible in almost all the commodity stocks, from cement to aluminium and paper to steel. A major reason for this is that the stocks in these industries, which command high replacement values high levels of investment needed to set up fresh plants - were languishing at very low prices.But with a continuing improvement in the offtake of cement, paper prices picking up after a long gap and petrochemical prices also stabilising, buyers are rushing in.

Most of the buying interest is believed to have come from US-based funds who have made a killing in cyclical stocks in the US markets. 'Currently, commodity prices globally are firming up and players expect a cyclical upswing in demand. To make a fortune in commodity/cyclical stocks, one has to time the entry well. That explains the current frenzy for these stocks in Indian markets,' says Bhat.

Even though some of these cyclical stocks such as bilt, itc Bhadrachalam, Grasim and nalco have already gained between 50 and 80 per cent from their 52-week lows, the feeling is that some of these commodity stocks can still appreciate further, for their prices even at this point are just a fraction of what they were five years ago. Says Bharat: 'The companies that have gained in this rally are the fundamentally sound ones with an efficient management.'

Mutual funds, which had high exposure in cyclical and psu stocks, are now witnessing huge windfalls from the current bull run, while infotech and software-sector specific funds have seen their navs dip sharply. Among the top 10 performing mutual funds, four are from uti. According to uti executive director Basudeb Sen, the reason for uti's success is the wide industry coverage the fund has in its various investments.

Uti has its year-ending in June and with the dividend declaration around the corner, it has to book profits. Observes a bse broker: 'In fact, the market should be grateful to the FIIs. Because, uti would have pressed sales heavily and the markets would have seen a new bottom had the FIIs not come in.' Among private sector mutual funds, Templeton's India Growth Fund, an open-ended equity fund with a major exposure to cyclical and psu stocks, has witnessed the sharpest rise, with its nav up 26.6 per cent since April 26.

A lot would depend on whether the current uptrend in commodity prices is seen as sustainable and if there will actually be an industrial revival. The fact that the Asian and Brazilian economies have largely moved out of the difficult positions of 1997-98 and that there are signs of recovery in Japan may mean that the worst is over and commodity prices may have bottomed out. A combination of price improvements and higher import tariffs may help Indian producers report improved profitability. Says Arora, who has refrained from going berserk with commodity stocks: 'Cyclicals will have to be evaluated on their individual performance. The global improvement in cyclicals might not necessarily affect Indian companies. If steel industry perks up, why should anyone buy Tisco or sail, they would rather pick the Korean steel companies.'

The newfound love for cyclicals is also based on signs of economic recovery. Analysts claim that the recovery in cement industry looks very strong, indicated by a 26 per cent increase in offtake during April. There have also been reports of higher diesel consumption during the same period. 'Excise collection is also up which adds to the recovery story,' says an analyst. Reports that the recession-hit Indian economy got a major boost with an inflow of $2.38 billion of foreign direct investment (FDI) in January-March this year compared to $3.3 billion for the whole of '98 has also buoyed sentiments.

The question now is how long they will stay buoyed.