The Hindu Business Line : Foreign investments spur growth of stock market

THE equity market continued its bull run for the third year in row as good growth in corporate profits and government policies kept the faith of investors (especially foreign) in the markets with major stock indices closing at a new high.

Investors showed keen interest in mergers, acquisitions, de-mergers and restructuring with mid-cap and small-cap stocks being the flavours of 2005.

For overseas investors, India was the hottest destination as more than $10 billion found its way into the equity market. However, an interesting feature was that foreign funds, which mainly came from the West in the past, were also seen coming from the East, especially from Japan.

Investors also made handsome gains this year with the BSE Sensex gaining by 40 per cent and S&P CNX Nifty by 35 per cent.

The assumption that the bull-run only make investors rich was proved wrong as several investors lost money in small-cap and micro cap as SEBI clamped down on some unscrupulous investors, promoters of companies for manipulating the stock prices. This led to sharp correction in several small- and mid-cap stocks. Some of the stocks fell more than 80 per cent from the peak value with a period of 1-2 months.

The investing community was sceptic when experts predicted that the BSE Sensex would move up to 9,000 points at a time when it topped 6,500 points. Strategy reports from foreign broking firms also said that stock prices were overvalued and further upside was unlikely.

For instance, when the BSE Sensex was close to 8,000 in mid-August, foreign broking firm, CLSA said "with appreciation in share prices, we believe that most stocks are now discounting high growth rates, implying that any near-term disappointments on growth raises the risk of a significant correction."

Another foreign broking firm, Morgan Stanley said India trades at a 30 per cent premium to the US price to bookvalue (P/B) multiple, making it possibly the most expensive market in the world.

On price-earning ratio also India was seen as most over-valued among the emerging markets. Despite this, the stock prices and indices continued to rise.

So what led to the surge in stock prices, despite scepticism?

"Higher consumer spending, strong retail and corporate lending, rapid infrastructure development, pick up in outsourcing — service as well as manufacturing, improved corporate governance, stronger balance sheets and capital expansion by corporates," says Mr Sandeep Sharma, Senior Vice- President, Head - SG Private Banking part of Société Générale Group in India.

"All this led to re-rating of PE ratios". He said aggregate earnings of the BSE-100 companies have grown by 18 per cent in the last four quarters and the PE multiples in India have got re-rated from 12 to 15 times of forward earnings.

Interest in IPOs

Large number of IPOs from new sectors also led to some interest among investors. IPOs from multiplexes, retail, branded apparels, newspaper, renewable energy hit the market this year. There were issues from traditional sectors such as textiles, constructions, banks and IT also.

Most of the market players say that rise in stock prices was followed by a fall, which is a good indicator for a sustained bull-run. For instance, Sensex fell from 7,000 in February to 6,100 in April. But from then it continued to rise to 8,800 in the first week of October and again it fell to 7,700 by end of October. From this, the benchmark index has further risen and now trades close to 9,250 after crossing over 9,400.

So how is 2006 going to be for the stock market? "Despite the run-up, Indian equities are still reasonably valued," says Mr Raamdeo Agrawal, Managing Director, Motilal Oswal Securities. He says the Sensex has doubled in the last two years, the Sensex P/E ratio is still below its last 15-years media P/E of 16.3.

More Stories on : Stock Markets | Foreign Institutional Investors

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
AP plans to drag Monsanto to MRTPC over Bt cotton royalty

Clause 49: Stock exchanges to stick to Dec 31 deadline

IOC-IBP swap ratio revised to 110:100

SAIL favours mega merger of steel PSUs — `A single entity is the need of the hour'

Power tariff hikes on cards — NTPC, SEB expenses `hauled' over the coals

Lenovo eyes consumer PC segment in India

Corporates paying over Rs 5-cr excise in metros — Large taxpayer units to be functional from April 1

IMD redemption will not hit liquidity: Chidambaram

Foreign investments spur growth of stock market

Lifetime offers may dent ARPUs for operators

Retail growth made for top-drawer stuff