Economic
Highlights
New Delhi, 24 July, 2017
Boom And Bust
STOCKS UPSURGE, ECONOMIC MAYHEM?
By Shivaji Sarkar
The stock market is booming. It is said to be
a global trend, despite not so boom in the world economy. Why and how is this happening?
Is it real or an indication of a global crash? Whatever goes up comes down, is
the stock market dictum.
The Indian stock market is on an upswing. It
touched a record (it goes on setting such records) 32074 at the Mumbai sensex
indicator on July 17, 2017. Though, next day, it fell by 363 points, the
highest in seven months. Two days later again it fell by 50 points to close at
31,904. It jumped by 124 points on July 21. The Nifty of the NSE is also in a
similar surge-fall cycle. Is it good time for investors? This is difficult to
say. Speculative investors put their money during such “boom”, the real
investors wait for good time – the bearish phase.
Market experts are awaiting a correction, the
euphemism for finding the realistic level, or a fall in the trading. Last
week’s fall was led by GST Council’s decision to impose cess on cigarettes and
the largest tobacco company’s stocks led the fall.
The stock market can be affected if some more
shots are fired on the Indo-Pak border or if Doklam stand-off between India and
China aggravates. But Doklam as of now may not be the reason. However, there
are stock specific concerns as many shares are trading at high valuations. Some
are priced so high that these may lead to stagnation.
The Indian economy’s high growth rate is
touted as the major reason behind the major rally. The belief is that high
economic growth should lead to higher earnings and this leads to support of
higher prices. But the market also says that nothing can be infinite and prices
have a limit to their rise.
The global markets are in a bull run. That
means some people are putting in large sums in the capital market. Does this
mean that falling bank interests and inflation led to improvement in the health
of the capital market? If it is so, it is a danger for the economy. It is an
indicator that bank deposits are being utilised to buy shares and do
speculative trading. Interest rates are low and so are the commodity prices. This
means that while the common bank depositors are gasping as their interest
hedging is coming down, equity market speculators’ earning is going up. In
other words, as the poor suffer, the rich are gaining!
This is a danger for both the economic and
sociological factors. Some large companies have come out with results of huge
profit in the April-June quarter. It is said that some more may be doing it.
While announcing profits, many of these companies carefully conceal their debt
in the balance sheet.
In other words, the performance of these
groups may further be affecting the health of the banking sector. It may be
recalled that two of the worst stock scams -- Harshad Mehta and Ketan Parekh --
were funded by the public sector banks. The UTI and LIC scams were of similar
nature. Public money was lost and the public institutions bore the brunt. The
lurking question is whether the better performing equity market would increase
bank NPAs?
That these fears are not unfounded is
supported by the Comptroller and Auditor General’s (CAG) latest report that
found that major telecom companies -- Bharti Airtel, Vodafone, Idea, Reliance
Communications and Aircel -- revealed
“total understatement of adjusted gross revenues (AGR) of Rs 60,064.5 crore”
between 2010-11 to 2014-15. The CAG says this is for saving taxes. But such
understatements are not uncommon. Recall Satyam too had grossly inflated its
statements.
The CAG stated the understatement of AGR was
linked to promotional schemes, which included free talk time, discounts as well
as non-inclusion of profit from sale of investment. The recent boom in prices
is significantly linked to the announcement of many such free schemes by one of
the biggest operators. In 2014, the government had issued show-cause notices to
some of the top telecom firms for under-reporting revenues.
So the fear of bank money being utilised for
speculative investments may be real. It means there are larger threats to the Indian
economy than being perceived.
An interesting aspect is that mid-cap and
small-cap stocks have seen greater increase in their prices based on “future”
earnings growth. If it fails to keep up with expectations, a sharp fall in
their prices would be the only possibility. The risk factor is serious as many
of these companies lack a strong track record of sustainable earnings.
India’s own macros and micro environmental
factors are stable and in a much better shape than it was a few years back, it
is often said. A strong leadership, political stability and a pro business
attitude of government has set a solid ground for future growth. If all goes
well we could be at the beginning of mother of all bull runs. But a lot depends
on how demand picks up locally and globally from here in coming years and how
fast corporate can translate these into their quarterly results.
Presently, if the CAG report is to be
believed much of it is window dressing despite the rules having been made more
stringent by SEBI and other government agencies. However, there are a few
positive factors. India is doing better than slow moving Europe and the US,
which cannot grow more than 1-2 per cent a year. Indian growth is to hover
around 7 per cent.
The second aspect is that global and domestic
liquidity is stated to be high. While the west is awash with cash, in India
large amounts of money are flowing into stocks with bank money. Another factor
is helping the stock market. It is the underperformance of other assets like
gold, real estate and even debt. In short term, the revival of these assets is
not foreseen. So the money flows in to the stocks.
Mutual funds too are playing big. They have
invested Rs 2,21,033 crore between May 2014 and June 2017. During the past
three months itself they invested Rs 26,503 crore. So would not the market
fall? A market crash is inevitable. But when will it occur? Nobody can
say. If it happens there can be mayhem. ---INFA
(Copyright, India
News & Feature Alliance)
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