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When Dalal St was mistaken for Disney World

Sunday, 17 December 2006 - 4:56pm IST
Investors are now in a quandary over whether to bail out expecting another dip, or whether the bull run will continue.

Investors are now in a quandary over whether to bail out or stay in the market

Investors on Dalal Street may be forgiven for assuming last week that they were on a roller coaster ride in Disney World. The Sensex gave a teeth shattering fall of 804 points in the first two days, ostensibly because of the hike in CRR by the RBI, but in truth because profits needed to be booked. But, just when investors thought jumping of would improve their survival chances, the roller coaster swerved swiftly upwards, with the Sensex gaining 619 points over the next three days to end the week at13,614, for a weekly loss of 185. The main gainers over the week were Infosys (which added 24 points to the Sensex), Reliance (21) and Satyam (20), whilst the biggest losers were ITC (-42) and SBI (-33).

Investors are now in a quandary over whether to bail out expecting another dip, or whether the bull run will continue. It seems, as of now, that it would be better to get lighter as the Sensex nears its previous peak of 14,009, perhaps even crossing it. That will be, as David Rockefeller once found out, when the shoeshine boy would give you a tip!

As always, the big worry to a continuation of the bull-run remains poor governance and an insatiable appetite for tax revenue. Airline stocks, for example, are down in the dumps. After the government opened up the skies to competition, fares have fallen, benefiting consumers. The first (and biggest) bite in that benefit cake is, however, taken by the government. To illustrate, on a Mumbai Bangalooru ticket, the basic fare was just Rs 925. Added to that was a Rs 975 bite by the government in the form of a fuel surcharge (Rs 750) and a passenger service fee (Rs 225), followed by a Rs 225 bite by the airline for a special service request and the congestion surcharge.

Or consider the stock markets themselves. Thanks to competition and use of technology, transaction charges (brokerage and settlement costs) have come down considerably. Yet, India remains one of the highest in terms of cost of executing trades, out of 42 countries studied (source: Institutional Investor, Dec 07 PN). India’s cost is 62.9 basis points, compared to say NYSE (17.5) or NASDAQ (20.66) or Malaysia (45.82) or Thailand (54.18). Perhaps this is due to the various taxes imposed, like STT, stamp duty, etc.

Look at your mobile phone bill and see how much gets added for tax. The benefits of competition for an economy and for the consumer, are thus whittled away by the inability of the government to control its expenditure and hence its appetite for tax revenue. The proposal to levy stamp duty, for property sale, only on the capital gains and not on the sale value is surprising, and welcome. This is as it should be, with one refinement   that of a holding period so as to discourage speculation.

The corporate sector is going great guns. The Tatas are not likely to give up the bid for Corus without a good fight; they have engaged Rothschild as an advisor. Tata Motors and Fiat are setting up a JV to produce 1 lakh cars and 2 lakh engines at an investment of Rs 4,000 crore. Reliance will join hands with ONGC to bid for oil assets in Iraq. ADAG group, together with KKR, the famous takeover firm that acquired RJR Nabisco, is in negotiation with Hutchison Essar to buy over a controlling stake.

UTI Bank is keen to acquire the UTI AMC; it has the right to use the UTI brand name till 2008, one that its own stellar performance has done much to promote. Should it be allowed to take over the AMC, it may require Rs 2,000 crore, which makes the stock look interesting.

The US Fed maintained its key interest rate at 5.25%. In India, interest rates are rising; ICICI Bank raised its lending rate by 0.5% and deposit rates by 0.25-0.75%. This ought not to be a major concern for the stock markets, which are yielding returns far, far higher than bank deposit rates. Also, favourable tax treatment on dividends (tax free) and long term capital gains (tax free) versus interest (taxable) will ensure that domestic savings will flow to the equity market and that domestic money will increasingly fuel the boom.

The Bombay Stock Exchange launched a welcome initiative, of providing live prices and news on a video wall outside the exchange, a la Times Square. As Sebi chairman M Damodaran wittily put it, investors can now see the writing on the wall.

The government is toying with the idea of putting some of its own funds into a fund which will, like Temasek of Singapore, invest in other countries. This is not a good idea. Singapore, or Abu Dhabi, does not have local economies with the capacity to absorb more funds. India does. India also needs the funds to develop infrastructure, both physical and social, which all governments have neglected to do. Far better to use reserves to build the infrastructure that the economy needs, and can easily absorb. The idea of investing abroad would only serve the purpose of allowing foreign travel to a bunch of people who don’t know a thing about investing!

It would be better to wait for now, for a proper selling opportunity.


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