Ever since the world's first important stock exchange – a roofless courtyard in Amsterdam – began operations in 1611, this market more than any other has excited, ruined and made men rich beyond their wildest dreams. It has whetted the gambling instincts of so many people that De La Vega's epithet of the Amsterdam Stock Exchange in the sixteen eighties was "this gambling hell". He went on to say, "It is foolish to think that you can withdraw from the exchange after you have tasted the sweetness of the honey." This is why John Brooks in his book 'Business Adventures' called the market, "the daytime adventure serial of the well to do".
The market in India went into a tailspin with the economic downturn in 2008 and limped back slowly till very recently when, in anticipation of a new government, change and reforms it began an upward rush breaking hitherto highs and piecing through the 25000 veil in May this year. There is excitement, anticipation and hope. There are many who claim that before long the Sensex will cross a mind-blowing 40000.
The clarion call is to get onto the train before it is too late. Is that so?
The Indian equity market is without a doubt outshining its peers with a year to date growth of 14.7%. The growth in France is 5.2%; in the US 4.1%; in the United Kingdom 1.4% and there is a negative growth in China of 3.6% and in Japan of 10.2%.
The growth has really been from March, and this is directly as a consequence of foreign institutional investment. From investments of $125 million in January and $229 million in February, in anticipation of change, FII investment grew to $3297 million in March. In the next three months, a further $6.3 billion have been invested. The others who have pulled the market up are the high networth individuals and financial institutions. The retail investor is a net seller not buyer.
The index is based on perception. Never on what will happen. The perception is that the new government with new initiatives will grow this languishing economy.
It is important to look at some facts though.
Inflation is very high. Costs are spiralling upwards as never before. Even though there are intents of controlling inflation, it does not seem to be happening. The monsoon this year is not likely to be a good one. It is already delayed and it is not unlikely that it would be as good as those in the last two years. This can have a telling effect on agriculture. The trade deficit widened to $11.2 billion in May from $10.2 billion in April. The growth in GDP is likely to be around 5.4%.
On the positive, industrial production has recovered. Consumer Price Index (CPI) has eased to 8.3% in May from 8.6% in April, and food price inflation inched lower to 9.3% in May from 9.7% in April.
Given this scenario, I do not think that the retail investor should enter the market now. The election euphoria will diminish in the next few months. The government has several areas to focus on to revive growth.
Inflation is too high. This has to be brought down. The public distribution system has to be reformed. The infrastructure has to be improved. The government must also get to grips with governing the country and begin to be seen to be implementing the promises made and the assurances given at the time of the election. It is only when these things happen that the Sensex will continue its upward spiral.
Foreign institutional investment is transitory money. If another market begins to be perceived as one of growth the $9 billion that has been invested up to now this year would move which can send the market on a tailspin.
This is not the time to buy. This is the time to sell those shares that you are uncomfortable holding. Hold on to shares of good companies and wait. Wait until you see real improvements in the economy – rise in GDP, industrial production, exports and a fall in inflation.
Palat is managing director of Cortlandt Rand Consultancy and an author