The bull run will be wilder in 2006 - so watch out

The elephant has traditionally been symbolic of India, showing it to be large, lumbering and slow, albeit able to gather speed when it wants to. If large flows of domestic savings into the stockmarkets continue due to tax concessions on dividend and long-term capital gains, one may well expect the bull to hold sway. Currently, less than 5 % of household savings is invested in equities. In a tax regime that favours dividend income over interest income, one can expect this figure to easily double. This, in itself, is reason enough to believe in a wilder bull charge in 2006. On top of this, foreign inflows are increasing, topping $ 10 billion last year. Now this amount is just a drop in the pool of global financial assets. In the rich, OECD countries, aggregate financial assets far exceed combined GDP.

These financial savings are always seeking higher returns. Consider the pension fund industry. In Britain, the number of pensioners will jump by 45% over the next three decades and, if they are to maintain their standard of living, the share of GDP transferred to them will have to rise from 9.4% at present to 14.5% (The Economist, December 3). Either they would face a cut in their standard of living or pension assets would need to earn better returns. Higher returns on pension assets can only come from the growing economies of China and India.

Companies, too, have huge underfunded pension schemes, as a consequence of generous pay packages negotiated with strong unions 30 years ago, when business was booming. General Motors, the world’s largest automaker, is very likely to file for bankruptcy, as did its largest auto components supplier, Delphi, recently, leaving it with an additional liability of $ 11 billion (incidentally, that’s more than the amount invested in India by all foreign investors last year, as a matter of perspective!).

The combined inflows of both domestic savings, aided by fiscal apartheid, and of foreign funds, aided by necessity, would ensure a bull well fed by liquidity.

The normal behaviour of markets is to have occasional dips in bull markets and occasional rallies in bear markets. These provide the opportunities for those left out to either buy in the dip or sell in the rally. One has been expecting just such a dip but an inebriated bull, drunk on liquidity, is not allowing it. One thought a correction had begun last Monday, when the Sensex fell 172 points, on fears about the post-demerger Reliance stock price. However, it rallied by more and ended the week up 141 at 9397. Of this 141 point gain, Reliance contributed half, followed by ICICI Bank (34 points) and Satyam (20). Only three of the 30 Sensex shares dragged the index down - ONGC, Bajaj Auto and HDFC Bank - by very small amounts.

The dip was irrational. Investors in Reliance would not lose financially as a result of the demerger; quite the contrary, they are expected to gain. The share price of Reliance itself will, naturally, drop, since investors will get equivalent, or more, value in four other shares of companies being demerged. The fear was that this drop in the Reliance share price would be reflected in the indices, in which Reliance is a heavyweight. This is nonsense! In all likelihood, the indices would be adjusted to reflect the fact that the investor does not, in effect, lose value. There is to be a special session on the BSE on January 18, to discover the price.

However, such price discovery ought really to have been based on adequate financial information about the companies being demerged. In the absence of such financial information, how would investors judge the value of the new shares and, thus, the value of the existing business? Since the demerger has been in the making for over a year, surely there was enough time for the regulator as well as the exchanges to have asked for and displayed the information to enable investors to gauge the prices on a more informed basis.

In corporate news, BSNL is to open, probably in January, a huge tender ($4.5 billion) for adding a whopping 60 million GSM lines! This would be one of the largest telecom tenders announced globally. The telecom sector is going through some interesting tussles, notably on the allocation of spectrum and the pricing of it, and on the relevance of the access deficit charges (ADCs) levied on national and international long-distance calls. All telcos need more spectrum to meet growing demand, but spectrum is a scarce resource. One view, shared by the communications ministry and people like Ratan Tata, is to auction it to raise huge revenue for the government. Another is that spectrum is a common asset, to be used for public good. The problem with auctioning is that it creates vested interests, which then disallow the use of future technologies, justifying the objection because of the fee paid. There are now technologies available that allow spectrum to be shared and perhaps the government should, if technology permits, allow it to be shared, gaining fees only as a percentage of revenues.

The market has moved up too high and ought to correct. One should buy into the correction. What factors would cause the correction can only be guessed at. Perhaps an impending cabinet reshuffle could cause it. The Indian bull would be wilder in 2006 - Happy New Year!