THE IRRATIONAL EXUBERANCE OF THE MARKETS
By Ruma Dubey
The markets have a mind of their own. No amount of logic or years of experience can help you sometimes decipher the weird ways of the Sensex.
Today, the markets opened dull, with no sense of direction but soon galloped as though running for its life, to breach 21,000 and actually hit a 3-year high. Has anything changed fundamentally? No. has the economic state improved? No. Has inflation come down meaning interest rates could get some succor? No. Has industrial growth picked up? No. Current account deficit remains a worry. Q2FY14 results of India Inc till date have been much more positive than expected but it would be too early to say that it is out-of-the-woods. Despite so many “no” the market is in a “yes” mode and that is indeed the most puzzling part.
Then there are other peculiarities too. Cement companies have posted dismal numbers yet the stock prices have not been beaten down to pulp. Ultratech Cement posted a 52% (YoY) drop in its net profit for Q2FY14 and yet the stock has stubbornly remained in the green. China reported a marginal improvement in its October PMI from 50.2 last month to 50.9; this was stated to be a 7-month high and metal stocks have zoomed up on hopes that demand will now spike up as China is back on the growth track. There is no sense of a strong bounce back in its economy, yet the markets have discounted this fact. Thus metal stocks in India are up in the green. The Finance Ministry will be infusing Rs.14,000 crore in PSU banks as funds are needed to boost their lending business and to meet new capital requirements under the Basel-3 rules that are being implemented in stages. This is reason enough for PSU banks, despite their NPA worries to zoom up into the green. And the case of IT is truly bizarre. Wipro posted a set of good numbers for Q2FY14, with consolidated net profit rising 28.5% (YoY) at Rs.1932 crore. This beat most expectations and it gave a much more optimistic guidance for Q3 than what most analysts had expected. Yet, the stock was the biggest loser on the Sensex, post the numbers. Even today, it remains in the red. Clearly, fundamentals and the stock prices no longer move in tandem.
Thus there are many fundamental issues, which continue to dog the markets yet the moods have turned around completely. On 21st August, the BSE Sensex was at 17,905 points and today, currently, it is trading above 20,890. This sudden turnaround from pessimism to optimism is all thanks to only one factor – the QE tapering getting postponed to March-April 2014. This has got the FIIs back to the Indian markets. For the past few days FIIs have been net buyers to the tune of $3.65 billion since 1st Sept. One should applaud them for their bravery but mind you, they are merely putting their dollars in the emerging markets till things stabilize in US. But no one seems to be coming here for the long haul or big time investments are missing. Equity markets are quick money and that is what they are planning to make and scoot.
Only one factor – FII buying is what is pushing up the markets to this irrationally exuberant levels. On 5th November 2010, the BSE Sensex hit a historical high at 21,206 points and that rise was based on the naïve belief that India was cocooned from any global turmoil as industrial production was hitting record levels. Today, we are around the same levels, with industrial production at pathetically low levels and there is no longer any misconception that India is sheltered from any global upheaval.
The moods have definitely turned cautiously optimistic but once again, it is purely based on the return of the FIIs. Thus to enter this market, at this juncture would be foolhardy. Nothing much has changed fundamentally. The Credit Policy is due on 29th Oct and with headline inflation showing an ugly double digit number, expecting rate cut would be foolish. Yes, the news which should logically bring cheer is the good monsoon and harvest is expected to be bountiful; that could spurt up demand for FMCG goods, tractors, white goods and maybe vehicles too. A lot of hope is pinned on Diwali demand helping companies get back on the growth trajectory.
Many are stating that the current rally is more about the elections. First is the state elections, results for which are expected on 9th Dec and these results are expected to give us some insight into things to come for the 2014 elections.
Well, we can work out reasons to explain this illogical surge in the market. Yes, reasons need to found when there are no straight answers. Retail investors like you and me would do best to wait and watch; this is a game of the “big sharks” and it is best for the small fishes to stay away.