Ordinary Indian investors, given their past experience, should run away from a rally in the stock market. All such rallies have previously ended in some scam or the other. Will the same happen this time' The answer is no. The current rally is supposed to be different in character. But didnít we think the same about all the rallies that led investors to burn their fingers in the end' There are reasons to feel insecure indeed, to doubt the sustainability of the current stock market rally and to stay away.
First take a look at the current crop of investors in the market. They are all backed by research. Only the shares of companies with strong fundamentals are rising. There is no mindless exuberance of someone rigging up prices in a few select counters. No large orders are placed on the basis of rumours of someone picking up some stock. So donít play the market if you donít have access to professional research.
Second, the excess of liquidity in the market. The money lying with institutional investors is chasing the stocks, which are strong fundamentally. Unfortunately, there are not many of that type. Money is therefore moving towards index-based heavyweight stocks. Coupled with an emerging futures and options market, this route offers an exit option to investors. In all, technically competent operators are moving the market.
When institutional investors with deep pockets play the market, individuals with a thin wallet should stay away. In this market, operators play for a thin margin, but big volume. Often towards the close of the settlement period of the derivatives market, market movements turn erratic. Squaring of positions in the F&O market has its impact on spot prices and, therefore, on the movement of stock prices. Emerging unscathed in this sort of volatility needs training and professional competence.
But look at the price-earning ratio. Currently, the P/E ratio is less than 20. In 2001, it was close to 40. Shouldnít the market move up further from here and touch a P/E ratio of close to 40' Since the economy is growing at a healthy 7 per cent rate, corporate India may end up with better earnings. In that case, logically, share prices will also go up, even if the current P/E ratio is maintained.
The investors, it is believed, have discounted the growth factor. Simply put, they have already taken note of the possible improvement in corporate profits arising out of the expected upturn in the economy. The next course, experts feel, will be on the basis of reports on corporate earnings. Unless an investor has the wherewithal to analyse a corporate performance, he should avoid sticking his neck out.
What to do
What then should a small investor do' He must not enter the market for one. But should he exit, if he has some holding' A prudent person will do so. He will book his profit and then park the money in some floating rate bond; avoid index funds since the potential for the index to move up fast enough is limited. The sensex may crawl towards 6,000, but the time taken to reach say 5,500 will be longer than it took to touch 5,000.
Should the small investor then withdraw his money from bonds and invest in the initial public offerings' Remember, gone are the days when one can make a huge profit immediately after the listing of an IPO. In the case of Maruti there was good profit on listing, but it was an aberration. The reason probably lay in the future strategy of Maruti disinvestment. Despite a heavy subscription, UCO Bank did not see a sharp profit on listing. But if one is a long-term investor, there is no harm in investing in fundamentally strong companies tapping the IPO market.
So sit back, enjoy the rally. Take solace in the fact that there is no Harshad Mehta or Ketan Parekh. The Indian market has at last assumed the characteristics of a developed market. A lot will depend on the regulators but with professional investors battling it out, it will be difficult to lure back hapless investors in the arena.