It took nine long years, from July 1990 to October 1999, for the Sensex to rise from 1,000 to 5,000. Five and a half years later, in February 2006, it crossed 10,000. And now, within one and a half years, it has reached 15,000. As the rapid acceleration in the Sensex has been accompanied by an impressive rise in economic growth, it is tempting to assume that this growth performance is responsible for the rise in the market. But it would be a mistake to correlate the two very closely.
There’s little doubt that one of the main reasons for the flood of money making its way into the market is the high earnings growth of Indian companies. There’s also no doubt that India has emerged as an asset class in its own right. Yet, a look at the MSCI indices shows that while India has been one of the best performing assets in the last five years, it has been outshone by the likes of Egypt, Argentina, Colombia and Peru—countries that hardly have India’s economic potential.
Nor is the acceleration in the pace of market growth peculiar to the country. The current bull run, which started in 2003, has seen an exponential rise in market indices across the world. The action is not confined to equities alone —other assets, too, have risen, ranging from commodities to real estate. The last few years have seen an extraordinary rise in risk appetite that has, coupled with low yields in the developed markets, sent investors scurrying across the globe in a desperate hunt for returns. Of course, whether the fabulous bull run is the consequence of liquidity alone, or whether far more fundamental structural forces are at work in the global economy, is a hotly debated topic. But the fact remains that global money flows and global events have an important bearing on the direction of all markets. Indian equities are no exception and the scaling of the 15,000 peak has occurred at a time when several markets in Asia, too, recorded new highs, as did the MSCI World Index.
That said, it is also true there are several favourable domestic factors that have boosted stocks. The inflation dragon seems to have been slain and interest rates are set to reverse direction. The stock markets had been seriously concerned about the impact of higher interest rates on the economy and on corporate earnings and the good news on inflation has been greeted with a rally.
But it’s also important to recognize the several risks on the horizon, rupee appreciation being one. In the global markets, it is still not clear how the subprime mortgage mess in the US and its impact on collateralized debt obligations will play out. Several central banks are in tightening mode and many fear a gradual withdrawal of liquidity.
But then, everybody knows markets are cyclical and will face ups and downs. What matters is how companies and governments take advantage of the good times. The corporate world has not been afraid to think big and has tapped booming capital markets and narrow risk spreads to borrow abroad on the one hand, and to raise large amounts of equity on the other. Unfortunately, the same cannot be said of the government. The idea is to put as much as possible of the money flowing in to productive use so that when the tide turns, the assets remain.
The government could have raised a lot of resources from the market by divesting even a small part of its stake in public sector units. It could have raised the level of foreign stake in insurance. It could have set up partnerships or special purpose vehicles for investment in infrastructure— given the appetite for Indian paper, it wouldn’t have been tough to raise money. China, for instance, has played this game to perfection. But the UPA seems lost to inertia, in part perhaps because it rarely manages to take along a Left that seems incapable of understanding economic reason.
How should the government take advantage of a strong market sentiment? Write to us at firstname.lastname@example.org