Charge Of The Bull Brigade

If ever there was any doubt about India winning the Kargil impasse, the stockmarkets decimated it last week. Five years and a minor border war later, the Bombay Stock Exchange (bse) surpassed the bull run unleashed by Harshad Mehta in the early '90s. On September 12, '94, the bse Sensitive Index (Sensex) had climbed to 4643.31. Last week, on July 14, the Sensex finally crossed that altitude to close at 4710.25, the new peak in its 125-year history. Says K.R. Bharat, managing director, Credit Suisse First Boston (India): 'We're in the middle of a bull run and though a correction is due (that is, the Sensex may fall a bit before rising again), the undercurrent remains extremely strong. Crucial macro-economic factors show clear signs of recovery and there's liquidity in the system. The Sensex is set to cross 5000.'

True to his word, on Thursday, July 15, it pierced the 4800 mark to the day's high of 4810.33, but closed lower at 4679.92 after punters decided to sell and book some profits. Says broker Ramesh Damani: 'It (the previous high) was almost a brick wall. But we've tested it and broken it. Even if it takes a couple of months to consolidate at these levels, I don't see any problem.'

Leading the charge were the foreign institutional investors (fiis) which breached virtually every stumbling block. Says Richard Wallace, managing director of Dresdner Kleinwort Benson India: 'We remain extremely positive and the indices should see further rise for the next month after which it'll go dull just before polls. While we're very positive on cyclical stocks (of commodity companies whose fortunes move in cycles), I think the whole market is going to perform. The ratings for cyclicals will improve, and on relative price:earnings basis, they'll outperform the rest.'

It started with the news of withdrawal of Pakistani troops.After a fortnight of a rally in cyclicals, the bulls zeroed in on fast-moving consumer goods and infotech counters with Hindustan Lever Ltd (hll) and Infosys leading the pack. In the first three days of last week, the Sensex gained 350 points. On Monday, the 30-share index spurted by 223 points, posting a new high of 4678.28 in an hour of trading. On Wednesday, the news of fiis pumping in Rs 411 crore the day before a single-day record spread like wild fire. There was no stopping after that.

Finance minister Yashwant Sinha summed up the sentiments when he said, 'I believe that it's a case of a lot of pent-up demand. After the budget, sentiments had improved but took a beating when Kargil struck. Now, with the conflict nearing an end, much of the pent-up demand is coming forth. If you look at the trends in the Sensex in the last few months, you get the impression that something was holding it back.'

Indeed, it must have been difficult for the markets to quietly digest the news of critical sectors of the economy looking up. Since May 1999, the Sensex has been on the upswing, dampened occasionally by the war and news of casualties. It was only the fear of a possible full-fledged war that kept the market down. Says an fii dealer: 'It has been clear for some time, especially from the way the market was taking bad news in its stride, that there was only one way for the market to go. With a more positive economic outlook and money flowing into the markets, the indices simply exploded once the enemy agreed to a withdrawal.'

But the markets are celebrating something more than the Kargil solution. The recovery in commodity prices is apace and demand in both domestic and international markets is improving. Asian economies are witnessing a resurgence, while the Dow Jones Industrials appear to be peaking out at 11,000- plus. Despite the war, domestic inflation is at a 20-year low and though the current trend may not sustain, yet another good monsoon augurs well for the future. Automobile sales, including commercial vehicles, are picking up. Cement offtake is up sharply, even steel demand is perking up. In short, the entire core sector, the bedrock of sound fundamentals, is looking up.

Also, take a look at the widening of the rally. Earlier rallies only took the pivotals in certain sectors high. For example, the rally in cement stocks has gone on long enough to spread to the smaller cement companies. The automobile rally has been spectacular enough to spill into auto ancillaries and even marginal players. Says an equity analyst: 'The heights which the market has scaled are not really highs at all, but a new base or floor from which higher rallies will be attempted now. The recovery is only just beginning and stocks will continue to reflect that optimism.'

Mutual fund managers feel the current rally is sustainable because it's driven by strong fundamentals, while the good news from the borders have just acted as a trigger. Says uti chairman P.S. Subramanyam: 'There's an across-the-board improvement in industrial demand and prices. This, coupled with cost-cutting undertaken by several companies, will mean better margins.'

Since April, all pivotals, excluding Bajaj Auto, have logged sharp gains. Stocks of companies sensitive to the economy's progress, such as telco, tisco, l&t, bhel and hpcl, are up sharply. The industrial sector has grown 6.3 per cent in April-May against 4.2 per cent in the same period last year, indicating improved corporate profitability in the first half of the fiscal. A steady decline in interest rates has added to the sentiments. The first-quarter and first-half results could spring surprises to buoy and stretch the bull run. Even after corrections, much of the recent gains about 50 per cent in just two-and-a-half months could be held on to. This is a striking contrast to the situation in '94 when it took about nine months for share values to rise 40 per cent to reach the watermark in September.

Clearly, the fiis, which poured in over Rs 1,000 crore in less than 15 days, have already factored in these issues. Total fii investments in July is set to exceed the record for May Rs 1,719 crore. In calendar '99, net fii investments have already touched Rs 4,695 crore and is set to touch a new record for the full year. In '94, fiis brought in $2.1 billion, worth Rs 6,791 crore. In '99, with a lower rupee and cheaper shares, they have put in a little over $1 billion, buying scrips worth Rs 4,695 crore.

Says an Economist Intelligence Unit report: 'Paradoxically, the conflict with Pakistan has highlighted the stability of the Indian economy, especially to foreign investors, by drawing attention to the disparities between the two belligerents. On March 31, India's foreign currency reserves stood at $29.5 billion (and have increased since the conflict began), while those of Pakistan stood at $1.8 billion. India's exports grew by 3.7 per cent in 1998-99, while Pakistan's had shrunk by 10.1 per cent. In '98, India's foreign debt was 20.9 per cent of its gdp, Pakistan's was 48.6 per cent. These disparities led investors to look at other elements of India's stability, such as the fact that its short-term debt was only 18 per cent of its currency reserves, and that despite the economic sanctions imposed on the country after its nuclear tests, its foreign currency reserves had actually increased. '

The report adds: 'A much more tangible cause for confidence is the strengthening of industrial growth. In April '99, the Index of Industrial Production (iip) was 6.8 per cent higher than a year earlier. More important, most of the growth was in manufacturing output, which was 7.8 per cent higher than a year earlier. So, the industrial recovery that began in November '98, is continuing to gather pace, although by past standards it's still weak. The sharp cut in deposit rates back in April (from 12 to 10.5 per cent) is another reason for the underlying firmness of share prices. This played no small part in enabling the market to discount the impact of the fall of the bjp government on April 18 and the onset of the border conflict with Pakistan in May. Investors, particularly foreign ones, are convinced that when the time comes to renew their fixed deposits, a large number of Indians will choose to return to the stockmarket.'

The big question is, will this rally attract the retail investor to the market? It's early to say so. Brokers feel the rally may soon become a paper chase. 'Some stocks, which were not being looked into, have started moving, which is not a healthy sign. Worse, the retail investor is beginning to make an entry with a correction round the corner,' says a dealer. There's the fiscal deficit to worry about, and to prevent it from running away, the proposal of a one-time Kargil tax. Says Deven R. Choksey of broking firm Kisan Ratilal Choksey: 'Technically, the market is good but we have to be cautious since it is very quickly getting into an overbought position.'

But fund managers are bullish. Says Shitin Desai, vice-chairman, dsp Merrill Lynch: 'The markets have shown a lot of strength with economic revival and the trend from here is northwards.' Adds Ajay Srinivasan, managing director, Prudential icici amc: 'Two factors that'll determine the future course of the indices will be quarterly results and foreign flows. There's a lot of optimism on economy-related stocks and it'll be tested in the next few weeks.' Another indicator of fii appetite for the Indian paper is the substantial premium at which the gdrs are trading. Most gdr issues of Sensex-based shares are trading at a premium of 20-30 per cent.

The money market has kept up with the stockmarket optimism. The rupee settled for about a month around Rs 42.75 to a dollar when Kargil hit. The nervousness pushed it down by around 60 paise from early May but the forward premia remained stable. The rbi also doesn't appear to be worried. Forex dealers feel that the central bank will ensure that rupee doesn't drop below Rs 43.50 during the next six months.

For the time being, then, all is conducive for the hope of the Sensex touching 5000. The iip data indicates a spurt in production of capital goods, up 19.5 per cent in May from 5.1 per cent in the same month of '98, and up 15.4 per cent in April-May this year from 8.8 per cent a year ago. Stock pundits are almost unanimous in the belief that save for minor technical corrections and the polls, the indices can only go northwards. Says a broker: 'If the next government at the Centre is stable, the Sensex will surely breach the 6000 mark. And if the bjp and allies manage above 300 seats and I think that's quite possible, a Sensex of 10,000 by 2003 can't be ruled out.' Phew!