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The Rediff Business Special/ Nikhil Faleiro

Sensex finds the 5000 mark elusive

On August 30, the 30-share benchmark Sensitive Index or Sensex of the Bombay Stock Exchange soared to 4965 level and looked set to touch the magical 5000 mark. Manish Shah, vice-president, Gold Crest Securities, recalls, "That day, many a small investor thought he would become another Harshad Mehta. Speculation was rife. Had the rally continued, the markets would not have been the same again.''

Exit polls suggesting the return of the Bharatiya Janata Party to power and the prospect a stable government powered the markets to new heights. Forecasts were that indices will soar. However, on Friday (September 24), the Sensex closed at 4750, nowhere near the 5000 mark. (See the table below for the movement of the Sensex from August 23 onwards).

From the table, it can be discerned that the Sensex ended at almost the same level as it was one month back. What went wrong? And, more importantly, what is in store?

The rally weakened, the bears moved in, the bulls withdrew, the sentiment plunged. Has something gone wrong? "No," says Asit Mehta, chairman, Nucleus Securities. "What happened was that the stock market entered into a phase of correction which came just after the spectacular rise. This does not necessarily mean that there is a downtrend. Once the results are declared, expect another surge.''

A variety of reasons led to the decline of the markets in September as compared with the August show. For one, the Securities and Exchange Board of India tightened the trading conditions. For another, the pre-election jitters surfaced suddenly, in spite of the glad tidings brought by the exit polls.

Analysts dismiss these dampening factors and are confident that the market will bounce back to new heights, soon after a new government takes office. Their advice: 'Small investors, this is the best period to pick up good valuations.'

The market undercurrent, they maintain, remains bullish, in spite of the erratic movement of the Sensex. Not everyone agrees. Stockbroker Varsha Desai says, "The exit polls had a strange impact on the market. No one exactly knows how the market will swing.''

Ridham Desai, a strategist at J M Morgan Stanley, who had earlier said that the Sensex would cross the 5000 mark, says, "The markets are not overheated . I feel, the index will cross the 5,800 mark shortly.''

There is a difference between the previous rallies and the latest one, say analysts. Earlier, retail investors had fully invested their money at the 4700 mark, thus leaving them with no financial resources to continue the rally. However, the current one is witnessing the entry of retail investors at higher levels. In August, when the foreign institutional investors were net sellers, it was the retail investor and mutual funds who kept the market alive.

The big question is: Will the new government be strong? Not only has it to be stable, it has to tackle the fiscal deficit. The bulls are hoping the new government will tackle the fiscal deficit, increase the disinvestment process and go full steam ahead with the reforms. The bears are pessimistic that the deficit may continue to grow, interest rates may rise and corporate spending may decline.

The expectations are high. SEBI chairman D R Mehta expects mutual fund collections to double to Rs 450 billion this year. In the April-July period, funds have already raised Rs 141.12 billion. Evidence of heightened retail activity can be found in the rise in the volumes of B group stocks. This is also an indicator that the rally has gained in breadth and is not just confined to the widely traded A group stocks. The B group now forms 30 per cent of the total traded volumes on the BSE, as against 10 per cent in April-May.

If the fundamentals are strong, then why is the market cautious? Why are the foreign investors shying away? Ajay Srinivasn, managing director, Prudential-ICICI Asset Management, says, "It's holiday time abroad, so the FIIs are away. But once they come back, the market will rise.''

There is reason to believe so. With valuations still fair, inflation is low, sectoral growth is getting stronger -- cement prices are still firm, car sales are up, credit growth is up and housing sales are on the rise. But will they be back to peak levels of August? "That depends on two main factors," says Sanjay Jha, director, Walchand Finance Company. "One, whether a stable government can be formed at the Centre and two, India's Y2K preparedness.''

Fund managers are afraid that investment in emerging markets will shrink towards the year-end as investors become cautious about markets that are vulnerable to the millennium bug. And with India becoming more and more Y2K compliant, fund managers are confident that India will overcome this problem by the year-end. Once that happens, then large sums of funds will flow into the country, which will be an additional boost to the capital markets.

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