Economic Highlights

New Delhi, 23 May 2009

Stock Market Surge

DON’T BE FOOLED, BE CAUTIOUS

By Shivaji Sarkar

The 2111-point rise of the Sensex in a single day last week, is no indicator of the direction the economy is heading. It needs to be seen with extreme circumspection.

On May 18, the Sensex touched 14,284 points. It was at 12,173 on May 15, a day before the Lok Sabha poll results were announced. On May 19 it closed with a mere gain of 17 points at 14302. By weekend, Friday May 22, it closed at 13887 – fall of 307points. The index was at sub-10,000 point levels at the end of 2008.

Indeed, it is strange that while all indicators, including Friday’s, review, of the economy by RBI, point to a deceleration of growth the stock market tends to rise. The RBI has brought it down to 6 per cent. Director of credit rating agency Crisil DK Joshi puts it at 5.5 and the International Monetary Fund projects it below 4 per cent.

The IT shares have started losing sheen as the rupee has started glowing. The JobSpeak, a monthly employment report of the online job portal, naukri.com, has painted a gloomy picture. It forecasts 22 per cent fall in hiring by IT firms and BPOs in the country. This apart, many companies, including Hewlett and Packard, are sacking their employees.

Does politics really have something to do with economics? The week’s movement, as the new government was preparing to take over, should indicate that May 18 was the most volatile day. The Stock exchange also recognized it by applying the circuit breaker twice – stopping transaction- since its inception in 1875. Within a minute the sensex had zoomed and investors were “richer” by Rs 3.6 lakh crore.

The movement should normally mean that the country risks are lower, foreign interest increases and so also diversion from investment in gold. Thus, gold prices marginally fell during the week.

Recall that soon after the presentation of the Union Budget in 1992, the stock market had rocketed as never before. The same happened a few years later. In both the cases the stock market had bust under two massive scams. This time around, one only hopes that something similar is not happening now.

Incredibly enough, the players in the stock market have strange ways of functioning to lure speculators, not the real investors. They also create scenarios, whenever, they feel their actions could impact policy decisions. This is so because the players are ever so keen on making a quick buck. They are aware that the policy makers want disinvestment in public sector companies. But if the market visibly remains low, it is not going to happen. As a result, they would be deprived of making their money. So this time they invested heavily on 46 PSUs. The gain was Rs 1.8 lakh crore, almost 50per cent of the total volume traded.  Will this ploy change the decision of the policy makers? If it does it should go to the credit of the stock market gamblers.

Undoubtedly, disinvestment is a contentious issue. During the recessionary period, the public sector was the one least affected and there was a situation wherein some of the PSUs posted spectacular results. These undertakings are pieces of rare silver. Giving them away to speculators for a few copper chips would be the most imprudent decision. But a government facing a cash crunch might be tempted to do so if the stock market could manage its operations till such time.

So far, everybody is seeing the surge as a positive trend. In 1992 too observers had not seen anything wrong either and the then finance minister was even given credit for it. It’s a different story that later the government had to set up a joint parliamentary committee and subsequently introduce SEBI the regulator.

Clearly, the present situation needs to be seen with a microscope. Nowhere in the world has the stock exchange ever had so much gain --17.3 per cent-- in a single day. The CAC of Paris stock exchange gained 11.1 per cent on October 13, 2008; Nikkei of Tokyo gained 14.1 per cent on October 14, 2008; Nasdaq Composite of New York gained 14.2 per cent on January 3, 2001 and Dow Jones of New York had gained 15.3 per cent on March 15, 1933.

However, the caution is noticeable in the operations of mutual funds. Betting is on only on large and comparatively stable stocks. The weeks’ monster rallies do not appear to have forced an immediate change in asset allocation strategies. Besides, those active are mostly the foreign institutional investors. It is difficult to say whether they are investing only for profit taking. If they are aiming at controlling or capturing indigenous firms, particularly the PSUs, it should cause anxiety and worry.

Importantly, the government must be cautious in its decision-making and policy formulations. It should not be misguided by the stock movements. It should remember, investors and the financial sector lost Rs 246 lakh crore lost in several stock scams since 1992.

During the past five years, PSUs could net only Rs 8000 crore at the stock exchange. Between 1999 and 2004, they got Rs 85,000 crore. Surely, the fundamentals of the PSUs have not changed in a week. Instead of satisfaction, eyebrows should be raised. An economy that is besotted with a plethora of problems like high prices, rising unemployment, excessive withdrawal of provident fund savings by one crore jobless people, falling forex reserves to $252 billion form $ 309 billion and declining exports, the movement of the stock market is certainly out of sync.

The appreciation of the rupee also needs to be seen in this context. The sudden 3.02 per cent rise in the normal course should be welcome, but it has come with a number of questions. The immediate fallout is seen on the IT companies, whose stock fell sharply, as their businesses are likely to take a further hit.

Likewise, the government’s deficit is burgeoning. Tax revenues are likely to come down and so far no one has indicated any surge in the economy. Only on Friday last, the RBI governor D Subbarao said that he did not see any hope of an upsurge, at least in 2009.

Recent data indicate that the demand for bank credit is slackening. This is despite injection of liquidity through various monetary and policy measures since December 2008. Along with this, investment demand too has decelerated. Industrial production and manufacturing activities have registered negative growth. The services sector, which has been the prime growth engine these past five years, is slowing down along with construction, transport, communication, trade, hotels and restaurants.

 In such a scenario the stock index boom looks unreal and unsustainable. The investors, particularly the small ones, need to be extremely cautious. The nation is unlikely to gain much these activities. ---INFA

(Copyright, India News and Feature Alliance)