• JULY 20, 2002

Stock Market: Chronicling the Sensex

The past decade has been one where markets, net-net, are at the same levels from they started. Having said that, the nineties started and ended with a bang. Point to point, over the past twelve years; Sensex returned a healthy 12.2% p.a. However, much of these returns are skewed due to Sensex rising by more than 5x in the tainted bull market of 1992.

The graph also suggests that gains from the global technology bubble have been more than wiped out and a fresh start seems to be underway. More importantly, market folklore has it that no successive runs have been led by the same stock/sector. Will it be technology again? The current rally in the markets is not reflected on key benchmark indices, as it is primarily restricted to small and mid cap stocks. The trend is verified with the BSE 200 outperforming the BSE 100, which has out done the Sensex year-to-date.

We had mentioned in our earlier report that over the concerned period, market characteristics seem to suggest that a rally, more often that not, is driven by market operators or positive global sentiment towards equities. The same is vindicated by the biggest two rallies of the nineties. The domestic investor, retail or institutional without connivance of operators, has not been able to lead a rally. Consequently, does this category of investors lack the confidence to build a fundamental rally?

As has been reported, the Indian investor continues to hold fascination for TMT stocks, which control a large share of trading volumes. This tends to reflect the inherent speculative nature of Indian investors and reason for their high casualty and possible inability to build on fundamentals. Investor behaviour towards equities, especially retail, though maybe not intentional, can be likened to that in a casino. The underlying ideology seems to be to make fast and fancy returns. With a sizable percentage of investors operating in such manner, the markets tend to operate similarly. And due to the reflexive nature of markets, others tend to operate in similar fashion, which further strengthens this trend. It seems most market cycles are completed in 12 months.

We chronicle some of the rallies and their reasons. The run up in the 1994 rally is steep, which questions the sustainability. With economic liberalization in 1992 and strong emerging market characteristics, India was the hot story, bought especially by the foreign institutional investors (FIIs). The start of 1994 witnessed significant inflow of foreign money. Also, Morgan Stanley increased India's weightage in the much-revered MSCI - EMI (Morgan Stanley Capital International - Emerging Market Index). The rise preceded the then finance minister, Dr. Manmohan Singh's, budget for FY05. In fact, markets tend to rise in the January-February period in anticipation of the budget, which has been described as the 'January effect'. The immediate decline after the budget could be a bout of profit booking. But the subsequent decline could have been triggered by some capital flight, as from mid '94 the Dow Jones had started on its historic climb. Interestingly, the economic growth was the fastest -- above 7% -- from FY95 to FY97 but markets declined during the same period.

By 1996, the protagonist of the '92 securities scam was released and had won approval from the Supreme Court to undertake business activity. His presence in all likelihood was a 'feel good factor' and that only Mr. Mehta could lead investors to stock market fortunes. Harshad Mehta had fresh plans to revolutionise stock markets. Reports suggest attempts to have companies outsource their investor relations -- more appropriately -- stock market relations to the man. The principle seems to be that he would be the marketer/ambassador of the stock. The belief that corporates did not know how to obtain favourable valuations on the market and that one of the corporate objectives should be to support the stock, it seems, guided Harshad Mehta. We reckon Sterlite Industries, BPL Sanyo and Videocon were casualties of the ideology.

A payment crises on the bourses is likely to have led to unearthing the scam in mid '98. The crises was triggered by a precipitous slide on the Sensex post the Pokhran - II tests. The bottom of this sell-off coincided with the start of the global technology speculative bubble.

Trying to fit fundamentals to the historic Sensex movements, the meteoric rise of above 5x in the early nineties could have led to stretched valuations. Consequently, over the next decade markets moved largely sideways, as earnings caught up, reverting valuations to the mean. At 13.3x FY02 earnings, the Sensex is trading close to the lower band. Also, post October '01 lows, markets seem to have made a trend reversal. One could suspect the support behind historical rallies. Investors, especially retail, should learn how to make more fundamentally driven investments and avoid investments of short-term, speculative nature. After all, returns from gambling, in the long run, tend towards naught.

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