Riding the bull

The feel-good factor, which had eluded the stockmarkets for quite some time, is back. The 30-share BSE Sensitive Index soared past the crucial 4,000 mark this week and continues its upward journey, much to the relief of market players, investors and the government. The difference between this rally and others is rooted in fundamentals. There are several reasons why this market upturn is being seen as genuine, and not a bubble which can burst thanks to unscrupulous market entities. To begin with, the current market rally comes on the back of a strong showing in the first quarter by India Inc, particularly the smokestack companies and the traditional economy companies. Whether it is steel, or auto ancilliaries, textiles or even banks, the current bullishness is being felt across the board, cutting across sectors.

Most corporates today are either through with, or on the last leg of, major restructuring efforts. Banks are feeling the positive effects of the landmark Securitisation Act, which has errant borrowers running to the negotiating table. The economy is clearly looking healthier now than it ever did in the past three years, causing the revival of consumer spending. Consequently, the yawning gap between demand and supply — which had caused a glut in sectors like steel, cement, consumer durables and automobiles earlier — is now gone. Added to this is the soft interest rate regime which has increased consumer spending in sectors across the board. One of the crucial inputs to the return of the feel-good factor in the bourses is the monsoon, which, despite initial jitters, proved better than average. Another success story is the steel sector where players like the Steel Authority of India Ltd and Essar Steel have managed to bounce back thanks to the revival in demand and reduced interest costs. This is coupled with the country’s most efficient steelmaker, Tata Steel, continuing its good run with a rise in export demand. Encouraged by growth projections of between 6.5-7 per cent, which would make India the second fastest growing economy in the world, foreign institutional investors are also busy pumping in fresh monies into the bourses. The total FII inflows in the last eight months till August this year have already crossed the earlier record annual inflow seen in 2001.

But Indian bourses are known to witness crises after every major bull run. This time, the strength of the current rally has brought into the fold even the penny stocks in some sectors and this is where investors and the market regulator, the Securities and Exchange Board of India, need to exercise the utmost caution. In the euphoria of a bull phase, it’s important to remember that a decline can come even quicker than an upsurge if things go wrong.