The Indian stock market has literally been flying, but it appears that there are precious few who have developed any air sickness. What is going on, and how long can the free flight last?
Not very, if the signs are anything to go by, not to mention that the market may have in large part adjusted to the new Indian reality -- a reality that has GDP growth above 7 per cent as the norm, and industrial growth crossing 8 per cent.
The fundamentals, especially for the industrial sector, are very, very good. Over the past 50-odd years, there have been several economies in the developing world that have averaged industrial growth above 8 per cent for any consecutive 10 years.
In this list are practically all the East Asian economies, including Vietnam. Several of these economies (e.g. Japan, Korea, China, Indonesia, and Malaysia) have managed not just one, but several consecutive 10-year periods with industrial growth above 8 per cent. Outside of East Asia, there is Brazil in South America, and Cameroon, Uganda and Algeria in Africa.
Closer home, Bangladesh, Pakistan, and even Nepal have managed this feat. (The list is not exhaustive, but illustrative.)
Curiously, though, India has never managed to do so, but given the restructuring over the last few years, and the healthiness of the fundamentals (primarily a competitive exchange rate and a decline in real interest rates to international levels) indicates that India will achieve 8 per cent plus industrial growth over the next 10 years.
The recognition of the above reality -- maybe a major reason why the Sensex, languishing in the 3,000-4,000 range for practically all of the ten years from 1993 to 2003, has jumped and is today within a spitting distance of 8,000. No end seems to be in sight -- and that is precisely the problem.
I have been travelling (in England and the United States) over the last two weeks and have met several market professionals. There is no one who has not bought the Indian fundamentals story.
That is the good news. There are precious few who have only recently bought the Indian story. That is the beginning of the (short-term) bad news.
There are seven reasons why, as someone who believed in the Indian story when it (perhaps) did not even exist, and who continues to believe in the fundamentals story (it will only get better), I am worried about the stock market.
1. First, that stock markets, by definition, are supposed to anticipate the future at least six months ahead -- the familiar 'discounting' of what will happen the day after.
Rough calculations show that the structural interest rate decline was factored in when the Sensex was in the low 6,000 range. There is also the growth in earnings per share (the restructuring story), a fair amount of which has also been discounted. That is one major reason why the market is close to 8,000.
2. The second reason to be worried is the speed with which the 'structural' adjustment has taken place, especially since the Sensex made 6,000 its benchmark level (rather than 3,500 in the previous decade).
This adjustment has taken place without any correction whatsoever -- that is very worrisome. A healthy market is one which proceeds as a two-way street; an unsustainable market is one which proceeds without fear. There is no fear left in the Indian market.
3. Then there are international signs, especially the no-fear purchase price of the Chinese web-site, Baidu.com. Add to it the international fundamental signs of a higher, sustained oil price; signs that short-term interest rates will continue to go up; that not only India, but the world, has been awash with liquidity for quite some time now, and that quite a few markets are beginning to at least look tired; signs that there is some possibility of a trade-war between the US and China if, as most people suspect, the Chinese yuan revaluation of 2 per cent may be no more than a Chinese rope trick. This is the third reason.
4. The fourth reason to be worried is that, not unlike 2000, there is serious talk of a 'paradigm' shift in the Indian stock market. For paradigm shift, read the implication that do not worry if you purchase a stock for Rs 100 -- maybe it will go to Rs 95, at which time you can always buy more, because for sure the market is going to 150.
5. The fifth reason is that for quite some time now, people have been asking for stock tips -- tips not to make money, but how to make the most money!
6. The sixth reason is the euphoria as reflected by magazine covers screaming Sensex -- 10,000. The air is so thin out here and yet there is strength for the scream.
7. The final seventh reason to be really, really worried is that today there are seasoned and savvy and international market professionals who do not think twice about handing over their money to 16-year-olds to manage.
When this happens, and here I am showing an age bias and being youth incorrect, it is time (to borrow that exquisite phrase from the ultimate gambling game, poker) to fold 'em.
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