India has unsophisticated investors. I’m talking about stock market investors of course following the stock market crash, with Mumbai’s key Sensex index plummeting 19% from an all time and over-priced high of above 21,000 on January 8 to under 17,000 by Tuesday. Such a remark, judging from past Riding the Elephant experience, will generate a furious tirade of comments, especially from readers based in the United States who are always anxious to protect India’s reputation.
But how else can you explain a market which swings from such extremes. Last week it mobilized bids totaling an astronomic $180 billion for the $2.9 billion initial public offering launched by Anil Ambani’s Reliance Power (which has yet to produce a revenue stream). On Monday and Tuesday, it crashed, seemingly ignoring the country’s strong economic fundamentals. As Palaniappan Chidambaram, India’s finance minister, pointed out when he tried to calm nerves during the slide, the fundamentals are strong. The economy, he pointed out, is growing at around 9%, and the prime minister’s economic advisory council is forecasting 8.5% for 2008-09.
It’s not just Indian retail investors, but foreign funds (many of them based in the United States) that have been rushing herd-like into Mumbai in recent months – and then rushed out on in the past days. This afternoon I spoke to a leading Mumbai banker who has close links with the United States. “If anyone thought that having strong foreign institutional involvement in the Indian market would bring stability, it is clear that that assumption was misplaced,” he said (anonymously because of his links). He complained about a “lack of conviction and analysis” by foreign funds which “on Tuesday told me they were ‘getting the hell out of India’ and today are saying ‘buy.’”
The same line came from Pradip Shah, chairman of IndAsia, a Mumbai private equity firm, who said there were “a lot of unsophisticated players” and added: “Many are naïve and felt left out of the growth so rushed in thinking India was the center of the universe and that nothing could go wrong.”
With earnings and economic growth scarce elsewhere on world markets, funds have been scrambling irrationally, with little analysis, to be part of the record 21,000-plus levels. But for some time there have been worries about when the bubble would burst and what would cause it. Now we know – a combination, as had been feared, of international market falls and a local factor.
The story of the slide in world wide markets is well known. The main local factor was the $180 billion bid for Reliance Power’s IPO – $120 billion from foreign and local funds and $60 billion from private investors. That took $27 billion “out of the system” in deposits and was not available to cushion the market’s fall, says Manish Chokhani, a director of Enam Securities, one of the IPO’s lead managers. As the market fell, it was consequentially difficult for investors to meet “margin calls” for them to top up advance-payments on share purchases. Investors then sold existing holdings to raise the money, which added to the downward trend. Chokhani expects some $20 billion of that money to be released within a few days, improving liquidity.
Today the market has recovered on the back of the U.S. Federal Reserve’s 75-basis-point cut. The Sensex rose to a high during the day of 17,997 – up 1,267 points from last night’s close, its biggest-ever one day gain. It finished the day at 17,594 – up by over 5% from Tuesday, ending a seven-day losing streak.
Across India, small investors are feeling badly bruised, even wounded, by the crash. But some professionals seem almost relieved that what they have long expected and feared has at last happened – and are glad that what some call “absurd over valuations” have now been rationalized. “This is now a much safer place to be,” said one. They just hope that today’s bounce will neither be reversed, nor be followed by too fast a climb back to irrationality. Some people, they know, never learn.