Raging Bull, Hidden Bear

It was one of those rare mornings last fortnight when the Bombay Stock Exchange (BSE) opened lower after crashing the previous day. But you could never have guessed that from the mood inside the trading room of Mumbai-based stock broker Jayesh Seth. Traders were yelling to each other, over the phones, in snatches of Gujarati, Marathi, Hindi and English—and they were mostly buying. The decibel level signified that the stupendous, six-month-old bull run was on course, despite the recent fall. For, there's an old saying on Dalal Street: 'The greater the noise in trading rooms, the better the bullish sentiments among traders'.

In his office down the hall, a few feet away from the trading room, Seth himself was telling investors that the bulls (the buyers) would go on the rampage again. Staring at the sensex (BSE sensitive index) movement on his computer screen, he told one of them; "Dheele che ane choppy che (It's weak and choppy) and I don't like it", and quickly added that it won't last for long. In fact, both Seth and his chief trader, G. Devnathan, believe that corrections, like last fortnight's fall, are welcome. It would goad more investors to get in. They feel the sensex would cross the 5000-point mark, or even 6000, within a few months.

After all, from a low of 2834 points in October 2002, the sensex has zoomed to above 4400 points—a gain of 55 per cent. Foreign institutional investors (FIIs) are pumping in their dollars—nearly $3 billion in the past nine months—and retail investors seem to be back after getting their hands burnt in the previous market-related scams. Much of the macro and micro economy too seems to be in a good shape. "We maintain that the rally is driven by improvements in the economic fundamentals, health of companies and sectors, prospects of top line and bottom line growth and attractive valuations," says Suhas Naik, head (equity), IL&FS Mutual Fund.

In fact, these days, the good news—fundamentals, corporate results, or technicals—is lapped up by buyers. In Seth's trading room that day, a big cheer went up as soon as Tisco crossed the crucial Rs 248.50 mark. In technical parlance, it meant that the scrip could now rise further. Similarly, the optimism about better-than-before corporate results expected in the next few weeks is forcing the rise of several stocks. When it comes to bad news, it either passes by unnoticed, or has a momentary impact. Remember how the markets fell the day of the twin blasts in Mumbai, on August 25, but recovered immediately the next day?

Where's the good news coming from? At a macro level, we should witness a growth of 6.5 per cent this year, compared to 5.6 per cent in 2001-02 and 4.3 per cent in 2002-03. Good monsoons should propel rural demand. Also, growth this time, unlike in the past, is being led by consumption rather than investment. The housing boom is a case in point. Declining real estate prices and lower interest rates have seen an unprecedented spurt in real estate. Consumers are buying houses in large numbers. And despite the setback in the disinvestment programme, there is still optimism that it will pick up.

The rejuvenation of the Indian corporate sector has also helped build investor confidence. Analysts feel that Indian companies have transformed from being value destroyers to being value creators and, for the first time in a decade, the 2002-03 return on capital employed for the broad market is higher than the cost of capital. Says Dhirender Kumar, director, Value Research: "The fear of Indian companies being steamrolled by MNC competition is over." The turnaround and excellent performance was evident from the quarter-wise growth in sales, net profit, margins and earnings per share.

Unfortunately, this didn't get enough applause.Says Ravi Kapoor, head (equity capital markets), DSP Merrill Lynch: "Corporate India has restructured significantly and has been growing quarter on quarter, year on year. This was not reflected in market value." Adds Asit Koticha, MD, ask Raymond James Securities India, "Valuations had gone down to such low levels last year that this kind of a rise generally projects feelings of apprehension. But still, there is lot of value left in stock prices." And, according to Surjit Bhalla, director, Oxus research, "In April (this year), stocks were undervalued by 30-40 per cent."

Lack of alternate investment opportunities has added to the bullish sentiments. Returns on instruments like fixed deposits, debt funds, or even government savings schemes like ppf and nsc, have fallen, making stocks attractive. Then, as stock analyst P.N. Vijay says, the Indian bull run is part of a global surge in equities. Says he: "Asian markets have gone up around 30 per cent this year and so has ours." So the rally was really waiting to happen. Explains Bhalla, "The last three years, the market didn't go anywhere, it was just lumbering along. However, it was expected to rebound only till 3500, not to the level it has reached now."

Most fund managers have been gung-ho about the Indian stockmarkets for the past year. But for the bulls to succeed, a lot of money had to flow into equities. That happened when the FIIs increased their exposures in the Indian bourses. Explains Vijay: "The liquidity is coming from all sources. FIIs have pumped in $3 billion into India this year alone. Retail investors too have moved huge savings from banks to stocks as seen by sluggish growth in bank deposits despite robust household savings levels. The mutual funds are seeing accretions after a long time. The demand side is now very strong."

Increased retail participation is reflected in the increased volume, more so in the number of trades. Trades executed by institutional investors in a scrip, however large the order, count as one. Thus, the number of trades go up sharply only if a large number of small transactions, typically by small retail players, are executed. There has been a spurt in the figure, which has jumped from about 4,11,462 a day in January 2003 to cross 10,00,000 in August-September. The 200-scrip A group accounts for about 6,00,000 trades a day, compared to 4-5,00,000 before the bull run, while the figure for B1 or the second-rung group has improved to about 3,00,000 from less than 10,000.

The frenzy is visible in Jayesh Seth's office too. His firm is doing three times the business it was doing this summer, and it has been adding 200 clients every month. In addition, Seth is adding four new branch offices to his existing five, and another 50 sub-brokers across the country. To give you an idea about the retail interest, meet this old, greying man who entered Seth's trading room with a frayed bag full of thick sheaves of paper. He found a chair for himself, and began checking the prices of several scrips. He bought 20 shares of a scrip, sold 15 of another—all small trades.

At 77, Kaka, as the old man was known, turned out to be a retired owner of a tea brand but now his life revolved round scrips and markets. "In the morning, I check market prices in newspapers, then I come here, make a few trades, go back and watch CNBC while having lunch, and then I check the trades Seth's firm has done for me in the evening." His day ends with more of CNBC news. He has basically been a seller, getting rid of the stocks that he had been saddled with for a long time. Only now has he turned a buyer. Interestingly, he has also roped in his grandson to play the markets and the two keep discussing their respective portfolios.

However, the one question that troubles Kaka, and possibly millions of others, is: how long will this honeymoon last? Analysts and fund managers are quite confident that the bull rampage is here to stay.Says Vijay: "It has been seen that bull runs normally last anywhere between 24 and 60 months. So this should go on till at least mid-2005 with intermediate corrections. Valuation-wise we are still trading at 14x2003 earnings and 12x2004 earnings which is attractive." Prithvi Haldea of Prime Database adds: "Once the ball gets rolling, one starts looking at all the positive factors. The greed factor takes over very fast."

There are some who are willing to bet their shirts on the rising sensex. "I feel on a 6-9 months' view the sensex will gain another 10-15 per cent," says Dhawal Mehta, portfolio manager, Alliance Mutual Fund. Bhalla is more optimistic: "Our target for March next year was 4000 (points for sensex). By end-2004, we should be testing the previous highs of 6000 or so." But there are others who advise caution. Warns Rushabh Sheth, senior vice president and head (equity investments), Kotak Mahindra Mutual Fund: "Indian markets are exposed to a fair amount of political risk, which hurts sentiment in the short term. However, despite these risks, we believe there is still substantial scope for appreciation over the next 12-18 months."

Well, you can never tell. For one, the forthcoming elections, when largesse may be doled out to woo vote banks, could act as a dampener. Two, the FIIs tend to book profits before December. Finally, a few scams could tumble out of closets. Already, there are whiffs of those. In the past couple of months, a number of warnings have been issued by brokers and analysts on the rise of the so-called penny stocks. These are typically scrips that have, for years, been quoted at below their face value with little or no trading. Suddenly, they have seen price increases of between 300 and 1,000 per cent, volumes have shot up, and there's a concern that certain promoters or their friends might be propping up the shares.

So, if you want to ride the bull wave now, better be careful. Or else, follow the simple strategy of selling at regular intervals, at every minor peak, and buying again after a correction. Advises Naik: "Retail investors need to enter the markets with modest expectations and more importantly enter with a long-term horizon. By long-term horizon, I mean investors who have the capability of staying invested for a year. In this one year he needs to set a realistic target." Or else, he would be well advised to stay away.