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Coming Soon: A Longer Correction
J Mulraj

The week gone by was an eventful one. The Sensex hit another 1,000 runs, taking only 16 sessions to climb the 12,000 mark. The Reliance Petroleum IPO was oversubscribed some 50 times, garnering some Rs 1,30,000 crore in terms of application money, which must be some sort of a global record. Reliance Industries reportedly struck oil in the KG basin, with reserves estimated at 1 billion barrels, enough to give it an additional revenue stream of $ 1.5 billion a year for the next 15 years! Gold prices hit a record high, as did real estate in Mumbai, with more liquidity (both foreign and domestic) chasing assets.

Bank deposit rates being so low, they act as a disincentive to savers after taking into account the fact that they are taxed (dividends are not) and after accounting for inflation. So, as and when deposits mature, investors are seeking other avenues such as stocks, bullion and real estate.

This has added a few furrows to the Reserve Bank governor's brow, and, in his credit policy announced last week, he hiked the risk weightage for higher value home loans, loans to builders and loan against shares. He left interest rates alone.

The week ended with the Sensex at 12,030 for a weekly gain of 793 points. Reliance contributed 160 points and Infosys 98. In the coming fortnight, it is likely to give one spurt before peaking out in the medium term. The next downswing ought to be longer in duration than extent; in other words it will test the patience of investors who get adrenalin rushes through daily action. The intervening rally ought to be taken as an opportunity to get much lighter and wait patiently for the correction which, one feels, will be an extended one.

Good corporate results also spurred investor sentiment, especially from the IT companies. Infosys, TCS, Satyam, HCL Technologies and Wipro declared good results, with the first three also giving a 1: 1 bonus issue. This indicates that they are all confident of future earnings growth. They are adding employee strength at a furious pace.

Good results were also declared by non-IT firms, including ONGC, Gujarat Ambuja, UTI Bank, Varun Shipping, JSW Steel and Marico. ONGC made the highest profit for any corporation in India, at Rs 14,175 crore, but that was after it suffered from underpricing (forced by government) of crude, which it estimates at another Rs 11,900 crore!

It is, in fact, this expertise of our politicians in ruining a perfectly good party that is the biggest risk factor and will probably contribute to the extended correction that is likely. In a bid to hide the mess to its trousers caused by fiscal diarrhea, the government seeks to pass this on to others, such as public sector oil companies. It later compensates them by issuing bonds, which is funny because if it is going to bear the burden anyway, why do so in a roundabout way? The balance-sheets of Indian Oil, HPCL and BPCL, which the government deemed as navratnas (nine jewels), are swimming in red, impairing their ability to undertake projects.

S&P has improved the outlook for India's rating, whilst keeping it below investment grade. The concerns are the same, viz. the poor performance of several public sector units, despite some having excellent managers, because of constant intervention by the majority holder, the government, and the lack of infrastructure. CalPERS, one of the largest pension funds in the world, rates emerging markets for investment opportunities and India has dropped from 9th to 18th place out of 27 markets which it says are worthy of investment. The low scores emanate from poor political stability, inflexibility in labour laws and capital market openness. One is surprised at the last named, for India is one of the most efficient and well-managed of markets.

In fact, few markets have achieved a T+3 settlement cycle as India has. The domestic market has enormous depth in terms of both number of listed stocks as well as number of investors and the market cap-GDP ratio has now hit 100%.

The market is likely to correct, albeit after a rally, in the coming fortnight. The rally should be taken as an opportunity to get lighter in preparation for the next downward correction which could be a long duration one.

DNA