Three-penny opera

Mumbai: The stock markets are supposed to be the barometers of the economy. The barometer is a nineteenth century device consisting of a vessel, which contains mercury. In the present day Indian stock market, if the vessel is likened to the Indian economy, it looks sturdy, while the mercury if is likened to the Sensex, it looks just like that — mercurial.

In just about four months, the Sensex has shot up from below the 3000 mark to over 4000 mark and is still rising. But does this steep rise in the Sensex really reflect the economy?

Says Arun Jethmalani, the CEO of ValueNotes (www.valuenotes.com), an independent research firm: "The Sensex is merely a number representing the movements of 30 stocks. Despite crossing the 4000 mark, the Sensex has actually under-performed the market, as some sectors weighted heavily in the Sensex [fast-moving consumer goods, information technology, pharmaceuticals] have not yet participated significantly in the current rally. Even among the old economy stocks in the Sensex, they may be the largest companies, but are not necessarily the best in their respective sectors."

First let us take a look at the economy. It is looking good after a long pause. The monsoons have been excellent, which means more rural income and good news for companies producing consumer and industrial goods. For the first quarter ending 2003, corporate results have been good and the future scenario looks encouraging even with the old economy companies, which have managed to rejig their act to cope up with present-day realities.

The global economy is also looking up and foreign institutional investors (FIIs) who pursue their own quaint and sometimes perverse logic while investing in emerging markets are pouring in money into India. The most significant fact, however, is that there is a lot of liquidity in the market and as interest rates are not attractive, this money is being invested in the stock markets. What is going on in Dalal Street is a liquidity-based rally.

"This time it is for real," say the glib-talking, insider-trading, Givenchy tie-wearing fund managers of the Samir Arora types. Arora, the former CEO of Alliance Capital, has been debarred by the Securities Exchange Board of India (SEBI) from trading in the stock markets. "You ain't seen nuthin' yet, come Diwali and the Sensex will cross the 4800 mark," or words to that effect, say the same Samir Arora types. The small investor, who is in the vortex of this upheaval, is falling for these lines.

A dubious picture?
The economy is, no doubt, looking good but will the gross domestic product growth, which is a measly 5 per cent plus, shoot up to 10 per cent by Diwali? Will the Fiscal Deficit be wiped out by Diwali? Will the real and long-term benefits of a good monsoon augur to the rural folks and industry before the end of fiscal 2004? No.

Then why is the mercury rising in such a hurry? Maybe because the Samir Arora types and the FIIs, who perhaps bought the stocks at 3800, want to sell it at 4800 before Diwali and proceed thereafter to conquer other markets.

To be sure these guys operate on the basis of fundamentals. And one of the fundamentals of investment is the price to earnings (P/E) ratio. And now take the case of Maruti, the newly entrant darling of the stock markets. This stock was recently offered to the public at Rs 115, it got listed last month at the stock exchange at Rs 150 plus and today it is trading at Rs 200. The present P/E of this stock is more than 20. In any other country, the P/E of an automobile stock does not go beyond 10. Will the Samir Arora types and the FIIs please explain that?

The Sensex consists of only 30 stocks while there are more than 4,000 stocks listed on the stock exchanges and strange things are happening here, too. Mid-cap stocks like Steel Authority of India are trading at a P/E of about 10 while Tata Steel, which is by all accounts a blue chip, is trading at a P/E of 5.

Penny stocks (read duds) like Lloyds Steel, which was trading at Rs 2 a few months back, has now jumped up to Rs 10, and Lloyds Steel is a loss-making, bank defaulting BIFR (Board for Industrial and Financial Reconstruction) company. There are reports that the share prices of even vanishing companies — companies whose promoters have vanished and now exist in paper only — are rising.

SEBI has begun an inquiry on the unusual movement of these stocks and SEBI chairman G N Vajpai has cautioned small investors about the rise of the Sensex. Kirit Somaiya, a member of the Indian parliament and the president of the Investors Grievance Forum, has also urged the small investor not to get carried away by the Bull Run and be careful before investing. No one seems to be listening.

That perhaps is the charm of being a democracy and the small investor can now only await the scenario likely to emerge after Diwali. If the market crashes after Diwali, they will be left high and dry and some penniless for the rest of their lives.

Last but not the least there will be pandemonium in the parliament. A joint parliamentary committee (JPC) will be formed, led by, in all probability, Laloo Prasad Yadav. The JPC will ask questions like: "Kaun becha? Kaun kharida? Kisne kise ullu banaya? Kisne kise churi mara?"

The JPC report will be ready in three years, by which time there will be another rally and another crash. At that time, this article will be published again with just about the dates and names changed. Watch this space.