While you were gone fishing...

While you were gone fishing…

It’s the influx of almost $ 4 billion in Foreign Institutional Investor (FII) money in May 2009, both before and after the election results, that resulted in the best May in the history of our bourses.

The $ 4 billion needs to be seen in the context of a total inflow of $ 17.23 billion, in boom-time 2007. That is when the Sensex hit its peak at just a whisker below 21,000.

And that inflow was preceded by the previous high of $10.5 billion in fiscal 2005. The next year, 2006, proved turbulent. It was when the FII and volatile Hedge Fund dollars via the Participatory Note (PN) route both came in and went out in great gushes.

The all-daring Hedge Funds did crack their winning streak in 2006, but got a second wind on the back of a Commodity boom, culminating, in 2007, in $140 plus barrels of oil and record metal prices. But whatever did come in, launched us, in 2006, on our upward trajectory again from the savage dip in summer which took out the lower circuit at least once.

From the Western perspective, sums like 10 or 20 billion dollars may seem palpably modest, but for us in India, it is enough to take the Sensex from a paltry 3000 in 2004 to the aforementioned 21,000 in 2007.

And in 2007, for a brief and shining moment, the market capitalisation of the Indian stock market mirrored the real economy at $ 1 trillion each! Of course, in comparison, the Chinese real economy is valued at over $ 3 trillion and the American economy at over $ 13 trillion.

This diminutive size of the Indian stock market is the reason why a little goes a long way. But it also leads to volatility when global causes turn into local effects irrespective of the merits we may possess in an individual sense, growing as we are at 6.7 per cent still. “Decoupling” as a concept didn’t come to our rescue in the down-turn but we may receive a vote of confidence earlier than the rest after all.

Once again, we may be on the threshold of a “secular bull market” rather than a “bear market rally”. Out there, the US economy is signaling a recovery in the second half of the year and so every country in Europe will likely follow suit too.

In India, the emerging market allocation is coming in, encouraged by the news flow. President Pratibha Patil’s address to Parliament was quite robust in terms of the Government’s intentions. There is news that infrastructure spending will be doubled to 9 per cent of GDP. There’s news that PSU’s will divest some of their equity while retaining majority stake at 51 per cent. And news that banks will lower interest rates; and that the government may increase the limits of foreign holdings allowed in insurance. And that they may liberalise the deployment of pension funds so that a proportion can flow into the equity markets.

We are also informed that manufacturing is picking up at last, even if exports are still badly hit. And the good augury that the GDP rate for fiscal 2008 is going to end at nearly 7 per cent after all. So, in June 2009 also, in the very first week, India has witnessed the highest ever weekly inflow of FII money at $ 199 million!

The domestic market is still shaky though, after the severe drubbing of 2008. Retail interest is muted, and institutional trading is hedging by concentrating on the badly-beaten down mid-cap and small-cap space, with very few mutual funds willing to go “long” even in these.

So the market is rising on foreign money. Over 3,000 FIIs are registered to trade in India, and have been responsible, over the years, for bringing in a cumulative investment of $ 88 billion till 2008; of which some $ 60 billion has never been withdrawn. Not even when they have taken profits, or liquidated at a loss, sometimes at a big loss, when pressures from elsewhere have forced them to do so. So most of this money is decidedly not “Hot money” and seems to have more conviction than we ourselves can muster.

The market is up 80 per cent from its lows last year, and up 27 per cent in the merry month of May alone. Of course, we are now climbing from just 500 billion worth of stock market capitalisation, made doubly attractive by at least 15 per cent decline in the value of the rupee vis a vis the US dollar, compared to 2007.

As for the domestic scenario, the surprise election results did make the locals ecstatic, but only for a day, in which for the first time ever, the Indian stock market hit two upper circuits to soar 20 per cent. But that was it. It is the FII’s that have been buying away through the work-a-day week, turning the stock market adage: “Sell in May and go away” …mostly fishing, on its deaf ear.

The adage stems from the generalised belief that the period from November to April has significantly stronger growth, on average, than the other months. The tradition grew around selling stocks at the start of May, holding the proceeds in debt market instruments, including bonds or bank deposits, to be deployed in equities afresh around the “festive season” or, in America, around Halloween (October 31st). But obviously, it is seen, strange times call for postponement of that peaceful fishing expedition to Sleepy Hollow.

If this level of FII cash flow persists for the remaining months of this year, all fundamental stock analysis including price/earning (PE) multiples will go out of the window, and the twin horses of momentum and liquidity will sweep all before it.

The only caveat must perhaps be the price of oil, already up to $70 a barrel. It is likely to surge on and up as the world economy recovers and may have to be factored in at a three digit price for the foreseeable future. This will put us back on an inflationary spiral, with our overwhelming dependence on foreign oil and increase our subsidy bill drastically once more.

Adages apart, we may have to go fishing again after all, if not in May, then perhaps in December.

(1,051 words)

Saturday, 6th June, 2009
Gautam Mukherjee


Appeared in The Pioneer as "A hot May for bourses" on the Op-Ed Page (side bar) and online at www.dailypioneer.com on June 12th 2009. also archived online at www.dailypioneer.com under Columnists.