Cover Story: Global Warming! Or, How the Bull Jumped Over the Earth

Across the world, stockmarket have heralded the New Millennium with a historic bull run, led by a global rally in tech stocks. With world markets more integrated than ever before, this is what may sustain the boom on the Indian stockmarkets.

"Since 1900, 7 of the 10 years ending in zero have seen the bourses peak within their first 2 trading days. But, in all of the 7 noted years, the stockmarkets headed down within the first 2 trading days.

1900: The top on January 2 (the first trading day of the year) was the highest close of the next 10 months.

1910: The top on January 3 (first trading day) was the highest close of the next 5 years and 7 months.

1920: January 3 (second trading day) was the highest close of the next 5 years.

1940: January 3 (second trading day) was the highest close of the next 5 years.

1960: January 4 (second trading day) was the highest close of the next 1 year and 4 months.

1970: January 5 (second trading day) was the highest close of the next 11 months.

1990: January 2 (first trading day) was the highest close of the next 4 months.

THE BUYERS: Global Investors and The Mutual Funds Whip Up The Frenzy
With the mutual funds raising mire funds, FIIs increasing their allocations, and the return of the retail investor, the Indian stockmarkets are a wash with enough money to stoke up share-prices for the next 6 months.

They say money makes the mare go. It holds true for the bulls too. Thanks to higher mobilisation by domestic funds, increasing foreign portfolio investment, and the possible return of the retail investor, the bulls are on a rampage in the Indian stockmarkets. Mutual funds mopped up Rs 25,210 crore between April and October, 1999, compared to Rs 12,288 crore in 1998.

Add to that inflows into equities from retail investors. In 1993-94, 23 per cent of household savings went into the capital market. This is down to 8 per cent. India's household savings are estimated to be

Rs 217,500 crore. Even a 5 per cent accretion would take the Sensex to new highs. Says Ridham Desai, 31, India Strategist, Morgan Stanley Securities: ''The ratio of ownership of equities measured by the market cap to M2 (money placed by individuals with institutions) is well below the trend line.''

Foreign institutional investment has shot up too-from a net outflow of $338.19 million (Rs 1,474.51 crore) in 1998 to $1559.89 million (Rs 5,057.12 crore) in 1999. Foreign institutional investors have poured in $10.30 billion (Rs 442,900 crore). With India emerging as one of best-performing markets in 1999, FII inflows may rise. Says Chandrashekar Sathe, 49, CEO, Kotak Mahindra AMC: ''Even if it is a few percentage points, it is big enough for us.'' Money will keep the bull run on.

Since 1920, the market in the first 2 trading days of the January of the zero year has tipped us off whether the pattern would work that year or not. If the Dow (Jones Index) close on either the first or second trading day of the New Year is higher than the highest close in the preceding month (December), then the pattern is scheduled to work, i.e., a top of some significance should be marked by the high close of the first 2 trading days...''
Peter Eliades,
Stockmarket Cycles

Suggest that to the herds of rampaging bulls the world over-and you can bet your portfolio that Peter Eliades will be labelled a party pooper. For, the stockmarkets across the globe have, probably, never ever been in spirits as high as they are in now. The run-up to the New Millennium was particularly spectacular. At the year-end, indices on every single bourse pierced the roof.

America's prime stock average, the Dow Jones, peaked at 11,522; on the NASDAQ, the mecca of high-tech stocks, the index shot up to hit a heady new record level at 4,131.15 on January 3, 2000; in Germany, the Xetra dax Index (DAX) touched 6,958; and, in London, the Financial Times Stock Exchange Index 100 (Footsie) peaked at 6,930.20.

Elsewhere, the same sentiment ruled. Stocks greeted the New Millennium by rocking the rafters. In Hong Kong, the Hang Seng Index touched a high of 17,369, Singapore's Straits Times Index climbed to 2,582, and Japan's Nikkei rose to 190,002.86. In Japan, software and tech stocks gained 370 per cent in 1999. And, in India, the Bombay Stock Exchange (BSE) Sensitivity Index (Sensex) rode into 2000 with a rise of 369 points to touch a historic peak of 5,543 on January 4, 2000.

As on the NASDAQ, the boom on the Indian bourses was stoked by tech stocks. Led by the vanguards, like Infosys Technologies and Wipro, valuations in the infotech sector touched dizzying heights. At one point, Infosys was gaining Rs 1,500 a day, and its price peaked at Rs 16,932. Likewise, Wipro peaked at Rs 3,034, NIIT, Rs 3,800, and Satyam Computer, Rs 2,565. Gushes Ramdeo Agarwal, 34, Director, Motilal Oswal Securities: ''Everybody seemed to be marching forward only in software.''

Riding on the back of tech stocks, other sectors, including cyclicals like cement, media, and consumables, moved up too, with gung-ho bulls predicting that the Sensex would cross the 6,000-mark in no time. But a night of high-spirited revelry is, typically, followed by a bout of self-piteous depression. Few things are more terrible than the morning after-even on the stockmarkets. No sooner had the party begun than it was spoilt. Just 4 days into the new millennium, the infotech-heavy NASDAQ saw the biggest-ever sell-out of tech stocks, with its index registering a 5.60 per cent fall. So did the Dow although not so sharply.

The crash took the mickey out of an extraordinary rally that had pushed up the NASDAQ to record a gain of 86 per cent over the past year. Curiously, the tech stock sell-off was triggered off by institutional investors who had reluctantly entered the sector last summer, when prices had dipped. Now, having made hefty gains, they booked their profits. With 90 per cent of tech stocks, particularly those of the Net companies, yet to make profits of any significance, big institutional investors had been, evidently, wary of putting their money in what they reckoned were chancy investments.

Indeed, even the US Federal Reserve's Chairman, Alan Greenspan, has described Net stocks as ''lottery tickets.'' Not surprisingly, late-entrants, like the institutions, ought to book early profits instead of pushing their luck any further. The biggest casualties of the tech stock sell-off were some of the last year's top gainers: the largest Net retailer, Amazon.com, the Net conglomerate, CMGI Inc., and the mobile communications group, Qualcomm. The Dow Jones Industrial Average, which is still weighted towards the non-tech stocks, followed suit.

Global stockmarkets aren't cocoons any more; they are linked. And, for the past 2 years, the vital link has been the tech sector. As soon as the NASDAQ tumbled, the tech-stock slump spread like a contagion across the globe: to Hong Kong's Hang Seng, to Japan's Nikkei, and to Germany's DAX. Everywhere, tech stocks took the hit and dragged the market down. In India, barely a day after 700 stocks on the BSE (364 on the NSE) hit their upper circuit-filter-fixed by the exchanges to restrict excessive volatility-the Sensex crashed to a low of 5,143.

Stockmarkets can be confounding. Like yo-yos. A few days after the global downslide, the indices appeared to steady once again. The NASDAQ regained lost ground; so did the other markets. In India, the Sensex bounced back to hit another record high-5,668 on January 10, 2000. That too, however, was short-lived. The pendulum soon swung back. On January 11, 2000, the Sensex crashed by 222 points to close at 5,296. The very next day, it rebounded by 194 points to touch 5,491. Clearly, fluctuation is the name of the game.

Forget fluctuations. The average investor the world over will not argue if you told him that the global economy and, therefore, the stockmarkets are now in the midst of an unprecedented boom. The 5-year bull market that began in the US saw the Dow Jones Industrial Average, the NASDAQ Composite, and Standard & Poor's 500 indices to finish 1999 at record highs. Although those indices are, at present, ruling at lower levels, bullish analysts see this as a technical correction. Otherwise stated, the NASDAQ's fall represents the sell-off of overvalued tech stocks.

Driven by the obvious reality that a technological revolution is changing our lives fundamentally, the valuations of tech stocks went wild last year. According to Lombard Street Research, a British economic research consultancy, the NASDAQ 100 companies have a market capitalisation of $3,360 billion, and earnings of $23.50 billion, which implies a Price to Earnings (p-e) multiple of 143 times-that is, double the p-e the Tokyo stockmarket reached at its peak in 1989.

Not surprisingly, tech stocks are what have been driving the boom. In the US market, the boom was hardly perceptible outside the sector. In the first 3 quarters of 1999, the S&P 500-tech stocks comprise 30 per cent of the total market capitalisation of the Index-gained just 6.16 per cent while the Russell 2000, a broader index of several sectors, moved up by 2.72 per cent. In contrast, the NASDAQ 100 (Microsoft, Dell, and Intel provide nearly 60 per cent of the earnings for that index) was up by 37.69 per cent, and the Dow Jones, not as heavily tech-skewed, gained 15.50 per cent. Tech stocks were, clearly, in the lead. It was only in the last quarter of 1999 that the non-tech sectors started perking up.

India has almost been a mirror image: the tech sector has been driving the markets mainly because, apart from Taiwan, India is the only market with a number of software and infotech stocks. Says Ridham Desai, 31, India Strategist and Vice-President, JM Morgan Stanley Securities: ''India has the second-highest weightage (10 per cent) in the Morgan Stanley Capital International's (MSCI) Emerging Markets Technology Sector Index. For people looking at software, the only significant exposure in Asian markets is in India.'' Taiwan, with a 77 per cent weightage in the Index, is, basically, hardware-driven. The rest of the emerging markets have a 13 per cent weightage. Q.E.D..

Ofall the emerging markets, FIIs assessed India as one of the best performers in 1999. It is not difficult to figure out why. The Sensex moved up by 71 per cent in 1999, and the South Korean market by 85 per cent. In contrast, Hong Kong gained 57 per cent, Taiwan, 44 per cent, and Thailand, 27 per cent. Says Samir Arora, 39, Head (Asian Emerging Markets), Alliance Capital: ''That India has performed well in 1999 is a big positive, and the FIIs who have not been in India are realising the problems of not being there.''

Strategists like Arora expect global growth to have a benign influence on the emerging markets for equity. Advises CS First Boston's global emerging markets strategy report: ''In Asia, Taiwan and India are overweight on the back of their strength in the technology sector and strong macro-outlook.'' Dan Fiemann, 33, Asian Strategist, Jardine Fleming, maintains that the largest emerging market in Asia is Taiwan because it is ''a fundamentally-strong market, with attractive valuations, currently held back only by temporary non-fundamental factors.'' Fiemann is also overweight on Malaysia, where he expects a recovery-as well as on India and China.

Some of the other Asian emerging economies, like Thailand, Philippines, and Indonesia, have deep-rooted structural problems that are responsible for the underperformance of their markets. Yet, some strategists feel these countries can close the gap with their New Economy theme. Increasingly, ASEAN companies will learn that they can boost valuations simply by announcing a Net start-up, and ''energetic analysts will spin stories even where the reality is lacking,'' says Fiemann. That means investors can expect tech stocks, tech stocks, and more tech stocks from these markets. In contrast, some Latin American markets-like Brazil, whose market gained 55 per cent last year-are attractive because of the likelihood of a re-rating by the international agencies.

How Important Are Cross-Border Fund Flows?
US Fund Flows Will Impact The Emerging Markets

The direction in which the emerging markets will move in the coming years will depend greatly on what happens in the biggest of 'em all: the US market. The influence that the US market wields over the emerging markets can be understood better by looking at the sustained bullish run on the bourses there, and the rising level of wealth in the US economy. With a market capitalisation of $14 trillion and increase in household savings, funds will need better destinations for higher returns. Global strategists, therefore, spin the globe to discover new markets, and shift asset-allocations to those that spell bigger opportunities. The destination of those funds will determine the next boom or bust in the global markets. Says Jardine Fleming's Fiemann: ''For Hong Kong and Singapore markets, it is important to watch US flows.''

In the case of India and Taiwan, however, because of the absence of capital account convertibility of their currencies, global inflows of funds aren't yet as big a factor for determining the fortunes of their bourses. Cross-border fund-flows from the US have led global equity market movements since 1985, when, according to estimates, a piffling 2 per cent of the US pension funds was channelled overseas or into non-domestic equities. In 1999, such flows constituted 12 per cent of the total corpus. With the corpus of pension funds estimated at $6,730 billion, it implied that flows valued at a hefty $800 billion went overseas.

Global investors expect that the real momentum will gather 2000 on because international diversification will become more prevalent in the US, and investors will start moving further out on the risk-curve in search of performance. During the last few years, with a boom prevailing in the US markets, diversification was not important. But now, with a growing perception of risk factors and valuations favouring the emerging markets, an increased flow to these markets is expected. Says the peripatetic Mark Mobius, 61, President, Templeton Emerging Markets Fund, who was in Brazil in early January this year to scout for bargains: ''We find value in several emerging markets. Value investing requires a long-term horizon. We do not make an investment today and expect returns by end-2000. Our average holding-period is 5 years.''