Markets Analysis

Birth of a bull run?


Image Credit: Nilanjan Das

Text messages are pushing stocks,  D-Street oracles on Mumbai’s local trains are beginning to sing hallelujah, and office boys are asking for stock tips. is this how bull runs are born?

ON WEDNESDAY, JUNE 4, 39 minutes after the opening bell, 37-year-old Rohit Parsai’s mobile phone buzzed with an SMS. “Buy beyond ur capacity for 25% return in a week and double ur money in a month. Buy “EMEDTECH” Code: 524588. Cmp.. 493 tgt.. 512 in intraday.. Add more till 470.”

Parsai, a resident of Bhopal, Madhya Pradesh, was an intermittent equity trader until a few months ago. Having recently started a stainless steel fabrication and furniture business, he has little money or time left for day trading. A cautious investor, he never trades on tips anyway, but the SMS got him curious enough to look up EMEDTECH.

The stock of Hyderabad-headquartered Technologies closed at Rs 469.70 on June 2, 7.8% higher than its opening price of Rs 435.70. The following day, it closed at Rs 492.85, after opening at Rs 469.80. And on June 4, the day of Parsai’s SMS, it closed at Rs 483.45, 1.3% below its opening price of Rs 490, after hitting a high of Rs 501.50. But it was the trade volume on June 3 and June 4 that tickled Parsai. On June 3, the quantity of deliverables—108,855 shares over 3,977 trades—showed an eye-popping 350% jump from the previous day’s 29,156 shares over 128 trades. The following day, it stood at 103,787 shares over 4,715 trades.

“Clearly, it was an operator-driven stock tip,” says Parsai, who ultimately didn’t buy the stock. “But the broader market is Modi-fied. This seems to be the beginning of a bull run.” 

Parsai and many more like him see “Modi-fication” (a catch-all term used to describe Prime Minister Narendra Modi’s stranglehold over national imagination) at work because the Sensex has surged 27.96% since Sept. 13—when Modi was nominated the prime ministerial candidate of the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA), amid high-voltage fanfare. Since the start of 2014 through to June 25, which includes roughly the first 40 days of Modi’s prime ministership, the spike has been nearly 20%.

In calendar year 2013, foreign institutional investors (FIIs) parked a net $20.1 billion (Rs 1.2 lakh crore) in the Indian equity market. By June 23, the figure had touched $9.8 billion—with over 96% coming between March and June, coinciding with the pre- and post-poll hysteria around Modi. 

From being written off as an investment destination when the United Progressive Alliance (UPA’s) policy paralysis was at its peak, India has become the second-best equity haven among emerging markets this year, after Indonesia. 

For context, rewind to the previous bull run that lasted from 2004 to 2008, riding on a buoyant global economy and India’s celebrated strong fundamentals, till the recession put the brakes on it. The Sensex had then peaked at a lifetime high of 21207 (Jan. 10, 2008), fuelled by an economy that grew an average 9.5% in the previous three years. This time, when the Sensex charged past 25000, India’s GDP growth actually halved to sub-5% levels, 4.7% precisely for FY14. This is at a time when the global economy is not out of the woods, with a precarious Eurozone and signs of real estate bubbles.

THESE RISKS HAVE ADDED TO the growing chorus that nothing on the ground can change overnight from the bleak economic realities of UPA rule. If anything, there’s the immediate spectre of an erratic monsoon, and a dangerous overload of expectations from the new Prime Minister. What then explains the love in the markets?


Mumbai-based Kush Katakia, owner of Beanstalk Advisory which works with high networth investors, says it as it is. It’s all about “perception”, which has “changed in a huge, huge way after Modi came to power with a sweeping majority—the first time this has happened in three decades. The optimism of foreign investors is unprecedented.” 

But Parsai believes this will inevitably culminate in a sanity check in the form of a market correction. That’s why investors like him have been watchful with their money: From 50.4% in 2005-06, financial savings of the household sector fell to 32.4% in 2012-13, while physical savings (gold and real estate) grew from 49.6% to 67.6%. 

Katakia says investors “foresee a real rerating of the country in the coming quarters”. That’s predicated on Modi kickstarting the investment cycle, opening up almost every sector, and luring in huge foreign direct investment (FDI) over the next three quarters, all feeding his target of 6.7% GDP growth by March 2016.

Not everyone agrees. In a May report, Ridham Desai, Morgan Stanley’s head of India equity research, wrote, “Low and negative real rates in the past four years fuelled demand for gold and property. Now, we think real rates may continue to rise largely due to tempering of inflation—this means property and gold will give up share in total savings.” Desai believes that financial savings should see a boost in the coming 24 months, if the government commits to cutting inflation, pushing up real rates.

KATAKIA, WHO HAD TO shift the venue for our meeting to a coffee shop because his office in Rotunda building on Dalal Street was overcrowded, says much of the excitement is because retail investors are coming back after five or six years out in the cold, even though “they are on the selling side now”. 

There’s still no sign of spontaneous jam sessions on stocks—once a fixture near the sandwich stalls or peanut sellers on and around Dalal Street—but there are green shoots on Mumbai’s local trains, which have had a formidable reputation for spewing stock tips for day traders, or even salaried commuters who trade for some extra cash. 

Uncle Joshi is a 58-year-old Gujarati commuter, a regular on the Churchgate-bound 8.06 a.m. fast local starting at Malad, a western suburb of Mumbai. On a humid early-June morning, he is excitedly discussing stocks with an audience in thrall. Five stocks are scrutinised, of which three are common between three commuters, including Joshi. It’s evidently a comeback of the good ol’ days, since less than a month ago the only topics discussed in Joshi’s compartment were gold, real estate, and, of course, Modi. 

An employee of a broking firm in South Mumbai’s Fort area, who has day-traded for his firm for 17 years but resisted the lure himself, beams, “Acchey din aa gaye!” (“Good times are here”). It’s the present-tense adaptation of “Acchey din aane waley hain”—the BJP’s election promise.

Another day on another train, a bespectacled middle-aged Marwari broker is barking stock tips into his mobile phone. In three out of four calls in less than half an hour, he repeats five scrips where share prices had run up post the election results. “Even if you see the prices up 50% to 70%, don’t forget that they are still a fraction of the highs we saw in 2008,” he says. But in the fourth call, his tone changes. “As your uncle, I must caution you,” he tells, I assume, his nephew. “Everyone is playing. Don’t get carried away while taking positions.” 

“I have seen people mortgage their homes to make the most of the bull run of 2006-07,” he tells me when I ask for a comment, refusing to identify himself as his firm chooses to keep a low profile.

There are others who have had first-hand experience of the market’s sobering hand. Nitin Shringarpure, 55, a former manager at a nationalised bank, had many customers who prematurely withdrew their fixed deposits to invest in equities. That lured him into equity investing in 2006, and over time, using his cost accountancy skills, he made calculated bets on 15 to 20 scrips. But he burnt his fingers when the market fizzled in 2008.

Shringarpure feels the current run is too quick, making him tread with caution. He has chosen to wait and watch till the Budget and the onset of monsoon before investing for the long term. These days, he bets on select stocks intra-day to keep himself occupied. “I will come in if the Nifty falls by 500 points,” he says. “[People say there’s a] bull run, but I will just not get drawn in.”

Shantikumar Chivte, a cancer specialist, was a passive investor who once held 40 to 50 scrips. He also left the markets after losing money in 2008. “Everything was smashed down to below base.” The double- and triple-digit growth in a few stocks recently made him study the markets again. “Surprisingly, there is a 100% rise in stock prices, but we are out of money by miles,” he says. He cites the example of Unitech, in which he invested at Rs 500 levels in the yo-yo days. The stock is now down to Rs 38, even though that’s an improvement on Rs 16 at the beginning of 2014. The fear of another crash doesn’t allow him to be part of the current euphoria. “We may have missed the bus when the markets rallied, but I don’t really believe that ‘this time it’s different’.”


There’s also a group of investors with a radical view: The index and its projections do not matter. Thirty-eight-year-old Shekhar Salgaonkar, who has dabbled in the markets since 1992 and has been an active long-term investor since 1996, says “indices never mirror the ground reality”, as they shuffle companies, which changes public perception. Indeed, over a 15-year time frame leading up to 2013, the BSE 500 index saw a total of 1,155 companies. The 30-stock Sensex has changed 85 companies in the same period. 

Salgaonkar judges the bull by its footprint. Chairs in front of brokers’ terminals are still empty, and brokers’ phones are still not ringing non-stop. “Retail investors need confidence. They come in herds at the end,” he says. “But the paanwallas and auto rickshaw drivers aren’t discussing stocks yet. When that starts, I’ll know the bull market is really on.”  
He finds support in Nilesh Shah, managing director and CEO of Mumbai-based Axis Capital. Shah points out the steep decadal rises of the Sensex—which was at 100 in 1979, 800 in 1989, 4100 in 1999, and nearly 20000 in 2009. “Every 10 years, the Sensex has grown by an average six times,” he says. By that logic, we are only 25% up from 2009, and there is lot of upside until 2019. But he concedes that “the fundamental strength is twice compared to the last bull run”: When the Sensex hit its first lifetime high of 21206 in 2008, the Sensex EPS was Rs 833. The average Sensex EPS during the last bull run, between 2003 and 2008, was Rs 524. For FY14, the consensus Sensex EPS is estimated at Rs 1,344, and by March 2015, the Street expects it to be Rs 1,575.

Away from the country’s financial capital, New Delhi-based Jagannadham Thunuguntla, head of research and chief strategist at SMC Global Securities, calls the current run a plain vanilla breakout rally. “After a long gap, people have got a chance to make money,” he says. They are in no mood to listen to logic now. 

Thunuguntla feels the current levels are reasonable compared to six years back, but adds that “this is the time for action, not analogy”. The hope is stronger because the new government is not another crippled coalition, but a bull run would depend on Modi delivering on key reforms.

MANY BROKERAGES THOUGH are in no mood to indulge sceptics. Their joie de vivre is showing up in their forecasts for the Sensex—between 27000 and 30000 in the next seven to nine months. 

Jyotivardhan Jaipuria, head of research at Bank of America Merrill Lynch in Mumbai, is one of those who raised the Sensex targets soon after Modi’s landslide win. Jaipuria upgraded the target by 6%, to 27000. His logic is based on the fact that both income and margin growth are at their third-lowest in the last 20 years, and an improvement could result in margins doubling over the next four years. Interest rates, meanwhile, should come down substantially in the next two to three years. 

Jaipuria’s Sensex projection values the market at 16.5 times price to earnings, a premium to long-term averages of 14.5 times. That’s in line with what happened during the 2009 elections, when the markets traded at 16 to 18 times for the rest of the year. For the short run, he is banking on the markets’ historical outperformance after elections. In five out of the last seven elections, markets gave positive returns up to one year after, with an average return of up to 36%.

Even when the Congress-led UPA came back to power in 2009, the markets jumped 20% on result day and closed the year positively. But the scene unravelled 2010 onwards, with a paralysed government spooking the markets. “The next few months will be based on expectations and announcements,” says Jaipuria. “The next year will be about delivery.” If all goes to plan, Katakia of Beanstalk Advisory says investors are in for a “secular bull run”. 

The underside: Inboxes are being over-run over by spam mails peddling demat and trading accounts. There are also bulk SMSes to win back dormant traders like Parsai. “Client enquiries have increased,” says Thunuguntla, but he is unable to shake off a nagging worry. “My office boy has been asking me if the current rally will sustain. That’s scary.”