Ravi Krishnan, N. Sundaresha Subramanian & Maulik Pathak
Mumbai/Ahmedabad: At the close of trading on weekdays, a small crowd gathers around Phiroze Jeejeebhoy Towers that houses the Bombay Stock Exchange (BSE) on Dalal Street to gaze at the ticker that flashes the prices of India’s most traded stocks.
One of the regulars flocking to this shrine to the equity cult is Shetty, a man in his late 60s who practises law in a bylane near JJ Towers (as the iconic building is known). He comes there to check on the prices of stocks he owns, in the fond hope that the current rally will push up valuations and he will break even.
“I burnt my fingers in the last one (the rally of 2008),” he says with an embarrassed smile, declining to give his first name and details of his portfolio. “Everything was rosy then and I purchased some shares based on tips I got from friends in this very place.”
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The BSE Sensex, India’s most widely watched index, is just 1,300 points short of its all-time peak of 21,206. At Monday’s close, it was trading at 19,906.1, up 311 points from the previous close. The broader benchmark Nifty index too is inching towards its all-time high of 6357.1, reaching 5980.45 on Monday.
The Sensex has gained more than 10% since the beginning of the month. But retail investors—an executive in a small firm, a small business owner, a student who invests her pocket money—are staying away from the market, scarred by their experiences in the recent past.
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The difference in the market compared with late 2007 and early 2008 couldn’t be any more stark. At that time, the Sensex was trading in a similar range. In that surge, which saw the index and indeed the prices of many mid- and small-cap stocks touch new peaks day after day, people shovelled all their money into stocks, even borrowing several times to do so. In restaurants, buses and local trains, everyone was fixing targets for the Sensex at “bees hazaar (20,000) and pacchis hazaar (25,000),” Milind Ranade, a sub-broker for LKP Shares and Securities Ltd, remembers.
Perhaps, nothing exemplifies that madness more than the share sale of Reliance Power Ltd, which hit the market in January 2008. It seemed everyone in Mumbai—including taxi drivers, security guards and domestic help—started opening demat accounts seduced by dreams of “doubling their money in 21 days”, says a broker.
The premium in the grey (unofficial) market was so high that the initial public offering (IPO) received more than four million applications. In the run-up to the issue, 1.93 million new demat accounts had been opened in two months. The Rs. 11,700 crore IPO, the largest in India till date, was subscribed 73 times.
“Even the paanwallah used to keep track of the Sensex movement closely,” says Bhavin Parekh, a vice-president at Angel Broking Ltd.
Flush with windfall gains from a rising market, people bought vehicles, gadgets and booked houses.
“I even used to put my business money in the markets,” says Jugal Thobani, 32, who runs a medical store in Jamnagar, Gujarat, and bought a motorcycle from his stock market gains.
But the financial crisis triggered by the collapse of Lehman Brothers Holdings Inc. in September 2008 halfway across the world led to a hard landing. The Sensex tumbled 52% that year. Small- and mid-cap stock prices fell even more. In the bloodbath that followed, no asset class was spared. Real estate prices crashed. Investor wealth, albeit on paper, shrunk. People with leveraged bets found they had not only lost all the money they had invested in stocks, but that they were also in debt.
“At least a thousand IPO forms a day were picked up in those days, but now it’s slowed down to 100-200,” says Milind Jadhav, who distributes share sale applications from a makeshift structure close to the BSE building.
Flight to safety
Badly hit, people started putting their savings into fixed deposits and gold.
Not surprisingly perhaps, new demat account openings have slowed to a trickle. After the all-time high of 1.02 million accounts being opened in January-March 2008, the number of new demat accounts opened has averaged 147,000 per quarter at National Securities Depository Ltd, the country’s largest depository.
Even the equity holdings of mutual funds have taken a beating, seeing outflows of Rs. 8,080 crore in 2010, though admittedly the ban on entry loads by the Securities and Exchange Board of India has been partly responsible.
“People have become wiser now, more cautious,” says Jaydeep Kashikar, a director at Brainpoint Investment Centre Pvt. Ltd, an independent financial adviser. “They read research reports and listen to advice.”
Indeed, the current rally is not broad-based like the previous one of 2008, with only a select number of scrips scaling new peaks. Only one-third of the 30 Sensex stocks have hit new highs, with some old favourites such as Reliance Industries Ltd and Hero Honda Motors Ltd underperforming. In the wider BSE-500 index, nearly two-fifths of stocks are trading 40% below their previous peaks.
One telling metric, which indicates that greed has not returned to retail investors, is the amount of leveraged bets they make. According to estimates sourced from the biggest brokers, investors used to put in up to five times the actual money they owned on stocks. In other words, a person with Rs. 10,000 would borrow Rs. 40,000 and invest. That has come to a more reasonable twice, and only wealthier investors are making these kind of bets, brokers say.
To be sure, valuations aren’t exactly cheap. The Sensex is trading at 19 times its estimated earnings for fiscal 2011, much above its average. This is higher than the 16.47 multiple for a market such as Indonesia, which has scaled new peaks.
The mood in brokerages is sombre. Cash market transactions have shrunk as a proportion of overall trading volumes and this has hit the profits of listed brokerages. Though some brokers are shutting some branches they opened during the past bull run, very few want to talk about it and they brush it off as a “regular reorganization which takes place all the time”.
The situation is even more dire among the smaller firms.
Take the case of Nilesh Kotak, who runs Dhanvarsha Fincap Pvt. Ltd, an Ahmedabad-based broking firm. Buoyed by gains from the previous rally, he handed out a month’s salary as a bonus to employees, took his family on a foreign tour and opened a new office.
“This time around, I am in no such mood,” says Kotak. “Overall business is down by 50% and the margin is shrinking by 20 basis points, so what do I celebrate for?” A basis point is one-hundredth of a percentage point.
The high fives and the cake-cutting in dealing rooms, the impromptu get-togethers for drinks at fancy bars, the mind-boggling bonuses, are all a thing of the past, said a dealer with one of the largest retail brokerages, declining to be identified as he wasn’t authorized to speak to the media.
At Geoffrey’s, a watering hole frequented by the high flyers of Dalal Street, Carl D’Costa, manager (food and beverages), explains ruefully that business has shrunk by half since “those days”. Earlier, the place was packed with fund managers, executives at brokerages and banks, who wanted to party at the same place as their bosses and the likes of Rakesh Jhunjhunwala and Ketan Parekh, to name just two large operators in the markets.
“The crowd has thinned out. Only the big men come here these days,” he says, pointing out Parekh and Andrew Holland, head of equities at Ambit Capital Pvt. Ltd, both of whom were seated at separate corners of the restaurant.
These representatives of big money and big institutions still swear by the Indian markets. Phrases such as “8% Indian GDP (gross domestic product) growth” and “30% corporate earnings growth” slip effortlessly from their reports as they build a persuasive argument to invest in equities.
It is their money, along with cash from foreign mutual funds and pension funds tired of the minuscule returns from developed markets, that forms the wave of liquidity that is powering equities around the world. Foreign institutional investors alone have so far invested around $15.8 billion (Rs. 72,048 crore) in India this year.
“Real interest rates are low in India. Any serious investor will have to invest in India,” says Nandip Vaidya, president of retail broking at the IIFL group.
To be sure, as history has unfailingly shown, greed and fear are never far away from the stock markets. Retail investors are the last ones to get information and typically buy at the highest levels and sell at the lowest, as studies of boom and bust cycles across the world have proved.
“When the markets rise like this, people feel left out,” said Kisan Ratilal Choksey, who founded a broking firm named after himself and has been observing the market for some 40 years. “If it continues like this, they will return despite having suffered previously.”
That will happen sooner or later.
“Right now, I am investing only in FDs (fixed deposits). But who knows? When my small caps break even…” Shetty murmurs almost to himself as he walks away to his office.
Ashwin Ramarathinam in Mumbai and Soumitra Trivedi in Ahmedabad contributed to this story.