Apr 25, 2001|
Stock markets: The US$ 2 bn bet
On the 11th of February 2000, the BSE Sensex scaled an all time high of 5,933. This marked the peak of irrational investing in India, as elsewhere in the world, where Technology–Media–Telecom (TMT) represented the investment universe to many. However, like all too-good-to-be-true stories, this dream run on the bourses came to an abrupt end. Over a year down the line and the Sensex was struggling at 3,184 (down 46%).
However, amidst all this volatility, there is one investor that has bet big, really BIG – the ubiquitous FII. In the calendar year 2000, when the index fell 33%, FIIs invested over US$ 1.4 bn in the domestic markets. Year 2000, by the way, was the year in which global stock markets came in for a massive drubbing. Despite the global gloom, money continued to find its way to India.
Year 2001 so far has a similar story to tell. Year to date the Sensex has fallen 9.3% (19.5% if you consider the low touched recently) but enthusiasm among the FIIs has shown no sign of waning. Indeed, net FII investment so far in calendar year 2001 has crossed the US$ 2 bn mark. This by far is the largest inflow of FII money that India has ever witnessed in the first four months. The bullishness is underscored by the fact that this money has come to India in a challenging global economic environment.
More on FIIs
More on the Indian economy
Consider the reasons why investing in the markets may not be a very appealing idea:
The stock market scam could get murkier, casting a shadow over any rally.
The ‘tehelka scam’ has once again brought to the fore the fractured nature of our polity. With state elections around the corner, there could yet be some repercussions.
The economy does not seem to be doing too well. Agriculture is still suffering from the unevenly distributed monsoon. Industrial production growth has almost stagnated. An indicator of the sluggishness is reflected in the sharp slowdown in the capital goods sector. The services sector, which was the growth engine in recent years, too has witnessed a slowdown this year. Then one also needs to factor in the impact of the removal of quantitative restrictions on imports.
Corporate results have not helped much either. Hindustan Lever, a consumer products and foods company, has recorded a growth of just 1% in turnover during the quarter ended March, highlighting the sluggishness in consumer demand. Then ofcourse we have the technology companies which took the wind out of the staunchest of bulls. Infosys’ warning, which now seems to be based on a worst-case scenario, contributed considerably to the fall in the market.
Why then are the FIIs so bullish? One compelling argument is that valuations are very attractive in the Indian market. But probably, apart from the valuation factor, there are some country specific reasons -
India, given its large middle class, is a potentially huge market. As incomes rise, consumption should boom resulting in better corporate profitability and growth.
Manpower, both in abundance and skill, is considered to be a strong point. This will give services – software and R&D for example, a big boost as demand for services finds its way to India. This will support growth in companies offering such services. Also, as more and more people find employment, consumption will rise.
The incumbent government seems to be doing its bit in pushing through with the reforms process. Although the pace is slow, it is nevertheless steady. These measures will help improve the sustainable growth rate of the economy, thus contributing to higher incomes (which, in turn, will support higher consumption). A good example of this is the recent cut in interest rates and the first tentative steps towards labour reforms.
Indeed, if this were to turn out, India would find itself in a virtuous circle where higher per capita incomes result in higher demand for goods and services. This in turn will support investment activity in the country, thereby further contributing to growth and employment.
If you are not that convinced, its fine. Most of us are still trying to find a convincing rationale behind this US$ 2 bn bet. One reason probably could be that flush with their annual allocations, FIIs jumped headlong into the declining and increasingly attractive Indian markets. However, the markets kept falling, until it crashed on the news of the scam. So maybe this just represents a bad investment. But then, there maybe something more to this investment rush. It won’t be long before the truth is out.
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