All of a sudden, the mood of the market is decidedly bearish and scores of analysts are openly advising investors to stay away. Meanwhile, investors continue to clutch at straws, as was evident from the rapturous reception to the appointment of Dr. Manmohan Singh and P. Chidambaram as Prime Minister and Finance Minister respectively. But the good cheer didn’t last; and memories of Manic Monday (May 17) have kept markets extremely nervous and jittery.
Is the dramatic mood swing in just over a fortnight justified? On May 9, a business news channel held a highly publicised investor meet that was addressed by top investors, investment bankers and brokers. Speaker after speaker sang paeans to a shining economy and forecast a bullish market. Things will only get better, was the collective wisdom. A week later, it was a different world altogether. At the end of the month, most ‘analysts’ invited to voice their views can see only gloom and doom. A new government certainly brings its share of uncertainty, especially when it is a rag-tag coalition that can only remain afloat with the support of the communist parties. But it is useful to put things in perspective.
First, the Bharatiya Janata Party-led coalition had as many teething troubles as the United Progressive Alliance (UPA) with frequent upheavals caused by their allies and by financial scandal. The movement of the Sensex is, as usual, the best barometer of investor sentiment, then and now. On May 7, 2003, exactly a year before the general election results, the Sensex clocked 2,980. Although the bull run began around then, the Sensex’s 52-week low at 3,158.74 was on May 30, 2003. Clearly, the economic shine, as reflected by the Sensex and touted by the BJP government was just a one-year phenomenon. The Sensex touched an all-time high on January 9, 2004 (6,249.6), well before the election results sent the BJP packing.
It is important for Dr. Manmohan Singh and Mr Chidambaram to remember this and not allow the Sensex to become a daily referendum on the performance of their government. I am not saying that they should ignore the Sensex. On the contrary, they must ensure that hedge funds and manipulators operating under the guise of foreign institutional investors (FIIs) do not manipulate sentiment or cause irrational panic and drive prices down. On the other hand, they must accept that some fall in stock prices is inevitable until the government settles down and begins to deliver on its promises, especially since the bullishness in March and April was only based on hope.
Although optimists hope that prices will remain neutral while the government finds its feet, there are too many discordant notes in this team. Stock prices are still substantially higher than they were last year and investors are bound to book some profit. If this drags down the Sensex by even a 1000 points or more in the next couple of months, it should not cause panic (except if it happens in 15 minutes).
Over fifteen years ago, as a reporter on the market beat, I covered a severe bear market. Stock prices dropped every day and nobody knew when investor sentiment would change or why the market kept discounting positive policy news. A senior and well-respected broker had candidly told me that he didn’t know what was driving short-term negative sentiment either; ‘‘But, as a broker, I can never admit that; my clients will run away if they think I have no idea why prices are falling. I have to have a new and plausible explanation everyday’’. It is worse today. Apart from brokers, we have fund managers and analysts, who are obliged to be extremely knowledgeable for the sake of their respective constituencies.
So let us put the different explanations for falling prices in perspective. They are all partly true, but do not reflect the whole truth. Sometimes, they are only aimed at facilitating intra-day price manipulation.
The crash began with irresponsible remarks about public sector disinvestment by the communist parties. While those statements indeed acted as a trigger, most investors know that the National Democratic Alliance’s (NDA) disinvestment programme had been extremely controversial throughout its tenure and was opposed by many of its own ministers. Forget oil companies, even the telecom ministry, headed by the disinvestment minister, privatised only the Videsh Sanchar Nigam Ltd (VSNL). The fat, Bharat Sanchar Nigam has in fact been protected through an archaic Access Deficit Charge that taxes consumers of other services.
The common minimum programme (CMP) was the second official damper. Again, savvy investors know that the CMP is a motherhood statement and not specific policy. Every Union Budget (including Mr Chidambaram’s famous dream budget) is replete with such populist rhetoric. Business and investors judge budgets only by their specific content for business and the economy.
The latest explanation for Friday’s 233-point Sensex fall is the threat to review the Electricity Act and the double taxation treaty with Mauritius. The Mauritius treaty is cropped up even during the NDA tenure, that too after the scam of 2000 revealed massive misuse of the Mauritius route. But even a Joint Parliamentary Commission (JPC) did not block this convenient loophole for the rich and the unscrupulous. With so many JPC members now in the Cabinet, there seems no need for the market to worry too much about the Mauritius treaty being scrapped.
In fact, the quality of ministers in Dr. Manmohan Singh’s Cabinet will probably be his biggest worry and handicap. Although the market saluted the appointment of Dr. Singh and Mr. Chidambaram, some of that goodwill was dissipated by the dubious reputation of many of their Cabinet colleagues. Their behaviour in key ministries is bound to have a more serious and longer term bearing on the performance of the Congress-led coalition government.
Instead of worrying too much about the short-term movement of stock prices, the government must get on with the job of delivering results. Stock prices will then zoom again and the short-term fall will be forgotten, just as the first shaky years of the NDA government have been obliterated from investors’ collective memory. During its tenure, stock prices reached an all time high, which ended with the Ketan Parekh scam and saw the Sensex losing 3,500 points in just 18 months.