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The Indian capital market is riding on the back of a strong economy. The market is in a bull-grip, with the economy on the growth path. The stock market mechanism is a good barometer of the nation’s economic health and business confidence.
The rise of the premier stock exchange indices has been spectacular recently. The benchmark Bombay Stock Exchange (BSE) Sensitive Index (Sensex) crossed the important mark of 8000 points on September 8 and scaled a new peak of 8634 on September 30, 2005. The Nifty, a broader index of the National Stock Exchange (NSE) closed at 2454 on September 8 and a historic high of 2601 on September 30. Notwithstanding the corrections in the indices. The feel-good factor among all classes of investors is reflected in the current bull run on the bourses.
The buoyant trend continues to prevail on the bourses on sustained buying by foreign institutional investors. (FIIs), mutual funds and retail investors. The banking, information technology and oil are the three sectors that have attracted more investor attention recently.
In July 2004, the Sensex limped past 5000 after having fallen sharply in mid-May on the impression that the United Progressive Alliance Government’s policies would be detrimental to the market’s interests. Since then, it has gone up by a spectacular 3500 points. It took 79 trading days for the Sensex to move from 6000 to 7000 while the next leap to 8500 came in only 65 days. Between September 2004 and now, the Sensex has gained about 3600 points or about 60 per cent.
A combination of factors rather than any single one, has pushed the markets to these levels. Foreign institutional investors some from non-traditional countries such as Japan, have continued to favour Indian stocks. During June 2004 to June 2005, foreign institutional investors have pumped in about Rs. 28,000 crore or just more than $ 58 billion, according to the RBI data.
A rapidly growing economy, a superior Return On Equity (ROE) vis-à-vis other markets in the region, low volatility in ROE, a strong financial system, low gearing and a robust corporate performance are a few reasons why the Indian Stock Market, along with that of South Korea and Taiwan has been courted aggressively by FIIs since 2003. For many types of investors, domestic as well as foreign, Indian stocks hold a great deal of appeal. Capital market regulation has been proactive. Corporate earnings have been at consistently high levels. The country’s economic fundamentals continue to be good. Indian economy has grown 8.1 per cent in the first quarter (April-June) of the current financial year according to the Central Statistic Organisation (CSO). The Finance Minister was optimistic of the economy achieving 7-8 per cent growth in this fiscal.
Analysis
Broadly, there are three fairly sound reasons why the stock market is surging. One, over the last 18 months, the global investor has discovered the depth and potential of India. Two, through the mid-1990s, Indian markets have gained depth, the quality of investors has improved and corporate governance in the new knowledge-driven companies is exceptional. Finally, profits in India, which is what equity investors buy into, are robust and expected to grow.
A look at the fundamentals including price-earning ratios (PE) give us good reasons to cheer. But first, let us know what the PE ratio signifies. It is the price of a share divided by the earnings per share (EPS) – the company’s profits divided by the number of shares. In effect, it tells us how many rupees one has to pay to gain ownership of a single rupee of the companies profits. Clearly, the lower this number, the more attractive the buy is. Remember, the lower this price earnings multiple, the steadier the market.
The Sensex has closed at record levels of 8634 points, but in terms of PE –based valuations, market indices are nowhere near new highs. On the contrary, the Sensex’s current PE of 17.5 times is the lowest when compared to previous rallies in the market. PE valuations were about 25 times in technical stock boom in 1999-2000. Besides, the bull run this time is more broad-based than ever before.
Finance Minister P. Chidambaram has ruled out a scam in the present bull run on the bourses, saying there is no cause for concern relating to the unprecedented rise in the Sensex.
The Finance Minister said the economy was driven by the fundamentals, adding that foreign investors have “great confidence” in the Indian market which is widely believed to be a “well-regulated” one. However, in a bid to ensure safety of investors in the unbridled bull run, stock exchanges have gone on high alert. They have tightened the price band mechanism to curb abnormal movements in shares.
The current bull-run which started in June 2003, has already survived more than two years, in marked contrast to previous occasions when the bubble burst in the period of an year. The latest bull run is based on expectations of sustained good performances of companies. It is also based on sound fundamentals. Investors are very bullish towards the Indian market with foreign institutional investors continuing to enhance their exposures to the Indian market. Foreign institution investors were allowed to buy stock in Indian companies in 1992. Since then, the movement in the Indian equity markets has largely been on account of the view point that FIIs take on India.
Indian corporates have come out with good results for two consecutive years, justifying the faith of investors. Both in 2003-04 as well as 2004-05, net profit of Indian companies went up by around 20 per cent. The good run spilled over to the first quarter of 2005-06, with firms posting encouraging results. A sample of 1765 companies shows that net profits for the first quarter of 2005-2006 jumped up by 46 per cent, while sales clocked a 15 per cent growth.
Market Caps
The last one year has seen the Indian stock markets growing from strength to strength. And statistics bear this out quite clearly, as both our premier exchanges, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have outpaced all stock exchanges in the world except the South Korean SE in terms of the growth of market capitalization. (Valuation of Shares of all listed companies).
During the period from July 2004 to July 2005, the market caps of BSE and NSE increased by 86.8 per cent and 86.3 per cent respectively, placing them next only to the Korean SE, whose market cap grew by 94.2 per cent, according to data compiled by the World Federation of Stock Exchanges.
India’s market cap today is the third highest in Asian markets, after Taiwan and South Korea. Therefore, Global fund managers cannot ignore India anymore. India’s total market capitalization now stands at Rs. 23,09,775 crore or approximately $ 520 million.
Foreign Institutional investors have continued to pour in money; the tally this year till mid-September has been $8 billion. Significantly, investors from newer areas, especially Japan, the world’s second largest economy, are beginning to invest here. Indian stock market is being re-rated by global investors. However, the recent run-up in Indian equity prices has been independent of the behaviours of global markets and reflects a growing demand for Indian stocks even when investment sentiment elsewhere is weak.
One of the biggest triggers for the rise of the Indian economy is the low interest rate regime. It has changed the face of Indian corporates who have not only weathered global competition, but managed to factor the steep hike in fuel prices.
*Freelance Writer
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