21,000, but who’s counting?

There was a marked lack of fanfare on Thursday as the Sensex reclaimed its peak of 21,000 after a three-year interval. Although propelled by a surge in FII (foreign institutional investor) flows, the mood on the street is suffused with scepticism. Far from being secular, the rally has been fuelled by selective stocks; hardly anyone who plays the market, retail investors included, believes the upturn is grounded in fundamentals. It is difficult to explain why FIIs have poured $3.8 billion into Indian stocks since the beginning of September, after having beaten a hasty retreat in the preceding months. In the last couple of quarters, Corporate India’s sales have slowed to a crawl and profits have shrunk; with rate cut hopes fading, balance sheets have taken a turn for the worse. Adding insult to injury, global agencies such as the IMF and World Bank have slashed India’s GDP growth estimates for this fiscal to sub-5 per cent, the lowest in a decade. Recent reform announcements, such as liberalised FDI (foreign direct investment) limits, have been slow in the implementation. A plethora of allegations has been levelled against large corporate groups on the coal and spectrum controversies.

Under the circumstances, there are only two rational explanations for the recent surge in FII flows — the recent stability in the exchange rate and the reflexive ‘India’ allocations from emerging market funds, thanks to the US Fed deferring its dreaded ‘taper’. The fact that FIIs have not turned specifically bullish on India is evident from their sector and stock choices. While pumping in new money, they have raised allocations to defensive and export-reliant sectors such as FMCG , pharmaceuticals and technology. They have stayed clear of banks, infrastructure and the core sectors that have close linkages with the economy. FIIs have also accumulated index stocks, shunning the vast majority of mid- and small-caps, polarising both stock valuations and returns. While a fourth of the listed stocks trade at over three times their book value, half of them languish below their book value. While the Sensex has gained 6 per cent this year, BSE Mid-cap and Small-cap indices have suffered steep losses of 16 and 21 per cent respectively.

These trends also explain why the recent Sensex move to 21,000 hasn’t seen retail investors thronging the markets as they have done during market highs. They have continued to sell stocks, pull money out of mutual funds and generally give equities a wide berth. Clearly, higher retail participation in equities, which policymakers are trying so hard to drive, will come about only if the bull market percolates to a larger set of stocks and creates wealth for small investors. This will require a concrete revival in the core sectors of the economy — from manufacturing and infrastructure building to services. The FIIs may be quite content with the promise of 5 per cent growth and quick-fix measures to shore up the currency, but domestic investors are much harder to please.

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