Follow the expert advice: give vent to your bullish sentiments
AFTER the violent see- saw you witnessed last fortnight on the Sensex and went on and bought some stocks, the value of your portfolio was perhaps shaved off somewhat. Are the experts losing it then when they urge you ahead? Heres a sampler of recent recommendations:
"In the long term were very bullish on India," says Vijay Advani, managing director, Templeton Asset Management (India) Pvt. Ltd.
Asserts Alok Vajpeyi, head of equities, BZW Asia: "The capital markets are on a bullish trend and this is the right time to buy. The Sensex should rally at around 4,000 points by the third quarter."
Lehman Brothers has recommended investors to go for the Indian market, forecasting a 12- month target of 3,900 points for the Sensex.
The Sensex has the potential to reach 3,800 to 4,000 level by the year end, says Merrill Lynch.
Can all these experts be wrong?
Marketmen believe the market is maturing. One signal: politics has become inconsequential to the operators. Says George Thomas, chairman and managing director, Fiduciary Capital and Financial Services Ltd: "Unlike the past when even a sneeze from the political masters would affect the Sensex, the bourses this time appear to have ignored the rumours galore on the political front." Adds Narendra Nagpal, assistant director, research at BZW: "Politics has become virtually irrelevant."
However, its difficult to find a trace of this maturity when indices shoot up over 250 points in a day only to crash by 100 points the next day. Admits Advani: "Theres no denying the fact that a lot of excitement in the market is on pure, unadulterated hype." But the long- term bullishness on the Indian stocks remains. Says Vajpeyi: "This is a good time for long- term investors to get in."
That the market is eagerly awaiting the sops promised by the Union Government has added to the euphoria. The brokers and market punters are almost confirmed that the Finance Ministry will soon announce some badly- needed decisions to boost market sentiment. Among the moves being considered are allowing companies to buy back shares, abolition or reduction of minimum alternative tax ( MAT ), cancellation of double taxation of dividends, parity of long- term capital gains tax with foreign institutional investors ( FII s), stock- lending by institutions and a revival of badla (carryforward) charges. Finance Minister P. Chidambaram has already declared his intentions to review the MAT . Says Thomas: "It may not be a zero- tax situation, but any reduction in the MAT would be most welcome for the markets."
He also feels allowing buyback of shares is only a matter of time. Says he:
"Unless corporates are allowed to buy back shares from the market, there are very few companies in the Indian market which will be away from a raiders grip." Buyback of shares would, once again, shore up liquidity in the market.
Above all, the market is eagerly awaiting SEBI s decision on badla. SEBI is planning major relaxations in the system to make it practical and acceptable to market participants. Among the stipulations where SEBI is planning relaxations are a cut in margin, daily reporting norms and more flexibility.
The move to revive badla comes in the wake of persistent demand from the brokers. The present system introduced in January 96 suffers from an excessive margin system which is graded upwards from one settlement to the other. Says M. G. Damani, president of the BSE : "An effective forward trading system is accepted in the financial markets as an essential ingredient for creating an efficient market and for performing the function of price discovery. "
Yet, it is the speculative undercurrent on all the stock exchanges that is prompting a few to be slightly circumspect in letting the bull run influence their savvy. Says Srikanth Jevalikar, heading the portfolio management division of Credit Capital: "I still wouldnt recommend retail investors to enter the market now." That some prudence is required for any investment in such a volatile market is accepted by all.
Perhaps the biggest indicator of the bull run is the low valuation of the Indian stocks and the ease in liquidity in the market. A majority of the stocks are priced below 10 or 15 times their earnings. Most of the valuations are based on 1995- 96 earnings. With only two months away from an entire year of growth, the valuation fails to reflect at least 15 per cent growth during the year. Some of the bluechip stocks are undervalued by almost 30 per cent.
That itself would be a good reason to buy. In addition is the expectation of sudden liquidity in the market over the next few months. Apart from the sur-plus generated by the cut in cash reserve ratio by 2 per cent, the bourses are also expecting money to flow into the country on redemption of India Development Bonds ( IDB s). A corpus of $2.2 billion (Rs 8,140 crore) will have to be redeemed by the SBI at the end of February 1997. A substantial part of this money could end up in the stockmarkets.
Also coming up is the annual allocation of funds towards emerging markets by portfolio managers all over the world. While India had slipped to fifth position in the ranking of hot markets for 96- 97 from a position in the top three in the early 90s, several FII s are hopeful that in 97- 98 and the year after, India might recoup its lost ranking. The economic forecast by Lehman Brothers says: "With the economy expected to recover this quarter, the outlook for cyclical stocks has improved."
The 4,000- point question, however, is:will all the promised sops materialise? The general feeling among punters is that Chidambaram and Gowda might just be in a hurry to move in these reforms as their swansong. This air of intense expectancy has turned the NSE terminals into gambling dens, says a broker. He explains that hundreds of these terminals are being hired by the month by professionals, many of whom have left their jobs to play the market. Confirms Thomas: "A phenomenal amount of short-term speculating activity is taking place. They are just replicating Las Vegas out there." What, however, is needed is the green signal from North Block and a market- friendly budget. These may not be too far.