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A tin-pot market

Oct 7, 1997

The market has risen with a vengeance. When the Index was 3,823, I stuck my neck out and said the market had gone up too much and that that was not a good time to get in. In fact, if you were one of the lucky few to be in the even fewer numbers of shares that have risen-it was time to book profits. In any case, we all felt it certainly wasn't the time to add new money. Well, I was wrong. The market is up some 6.7 per cent in the past two months and I am back to the drawing board-trying to figure out what I got wrong in making my `book profits' call. And whether it is time to swallow my wrong call and say: `Buy and ride the bull story'.

A re-look suggests that the political scenario is still confusing and silly. You have the Congress, which looks like it is firmly united behind all that Kesri stands for and yet the Congress is not so firmly behind the 13-party United Front. Within the Front, there are problems such as Laloo Prasad Yadav and the oil price hike. The Communists seem spot on target in their reluctance to increase oil prices and even T. R. Baalu, the minister of state for petroleum who publicly stated that the Ministry of Finance should give up some of its revenues to cover this so-called oil pool deficit, has been removed from office. I am sorry to say that the desire to sell oil assets to plug the overall deficit numbers seems to be so strong combined with probable preconditions of a `right environment' (an oil price hike) by foreign investment bankers will ensure that the communists lose their fight. Meanwhile, BJP seems to be doing a Congress dance at the state level in UP - supporting a partner in which it has diminishing faith. So, politics is still a negative: not good for the stock markets.

The economy doesn't look too great either. The little fillip in December 1996 and January 1997 that gave us the impression of an early recovery seems to have fizzled out despite good news like declining interest rates, a budget with all its fantastic tax cuts, and the rains that have arrived on time. So, what's missing? Why isn't that middle class (we claim they number 200 million) and the rising poor (another 100 million) queuing up with all their harvest money and tax-cut money to buy more Bajaj scooters, Lever shampoos, and steel and cement to build homes? Frankly, I don't have the answer and nor does anyone else.

The fact is: no one is buying anything. It could be laziness, fear of politics, or the fact that, instead of more wealth being distributed to more people, a larger chunk of wealth has just into a few hands and not created any mass buying power. Most of us expected an economic recovery by August 1997. Over the past few weeks, I have come to believe that it will be later. And this delay will hurt corporate results for the April-September period. So the economy still looks weak- as I'd expected two months ago.

The way with interest rates Interest rates are declining and liquidity, we know, is increasing. In fact, my November 1996 call to buy the market was based solely on this one fact of lower interest rates and better flow of money to corporates. The interbank call rates are now in the range of 1-4 per cent and on some days it falls to as low as 0.5 per cent! There is so much money lying with the banks that they don't quite know what to do with it. The larger corporates are getting money on their own and don't need to tap the banks or the institutions and this will increasingly force bankers to seek the next tier of slightly lower quality companies to lend money to. It's a tough exercise: if bankers do not lend, they lose money since the cost of their deposits is more than what they can earn on it; if bankers lend, they increase the risk profile of their portfolios. And the chances of CBI raids! This conundrum is also something I predicted.

Where I went wrong was on the strength of international money. Over the last few years-and carrying on in the past few weeks- there has been what is being termed `international exuberance' as opposed to the `irrational exuberance' Alan Greenspan fears. Every large central bank in every large economy is pumping money into the system. International interest rates continue to drop (UK may be the only exception now) and money is pouring into global stock markets. Within Asia, India looks like a better opportunity than many other peaked, peaking, or bombed-out markets like Hong Kong, Taiwan, or Thailand. The driving force for this buying is the global surge in liquidity and I have no idea when that will slow down but I do know that, when it does, all that went up will start coming down.

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