The Sheep Of Dalal Street.

     It’s happening. Both the Sensex and the Nifty have rallied to their lifetime highs and the rally hasn’t fizzled out yet. The party, apparently, is just getting started. A few months ago, in the wake of a depreciating Rupee, a ballooning current account deficit, an impending banking sector meltdown (which, incidentally, is only going from bad to worse) and a crisis of confidence in India Inc., the bourses weren’t exactly the prettiest place to be and returns were just enough to keep the wolf from the door. But now, in a few short months, the markets have shattered their 2008 highs and ventured into uncharted territory, all at a time when the underlying fundamentals are nothing to write home about. So, what and who are responsible for such a rally, one that only promises to get bigger and better?

     Well, in a very short time, India will be going to the polls and this time around, the BJP is expected to capture the elections and form the government at the Centre. And of course, Narendra Modi is all set to take over as the next Prime Minister of the country, if the BJP does win. The Congress would try to extract another term in power and the AAP is the dark horse. As far as the markets go, the 20% spike in the last few months has largely been propelled by the hope of a new BJP – Modi government at the Centre. The so – called Modi Trade has lifted the Sensex and the Nifty past their 2008 highs and foreign institutional investors (FIIs) have been adding fuel to the fire by investing more funds in India.
                                                                                                
     When the BJP won the elections at the dawn of the new millennium, the markets were 20% circuit – down, on the day that the election results were declared. This time around, the BJP has trumped the Congress in several state elections and opinion polls do seem to indicate that the pendulum is swinging towards the BJP. However, in the 2009 opinion polls, the BJP was the odds – on favourite to win but when it was all said and done, the Congress ended up vanquishing its rival. This time around, the country is in desperate need of a change and a BJP government might provide just that – a breath of fresh air. But at the end of the day, would a BJP government really be the panacea to India’s problems?

     Well, not quite. The BJP government has already declared its intent to do away with multi – brand FDI in retail and a drastic move of such a kind would certainly spook investors and dissuade them from investing in India. Furthermore, until the global economy picks up for the better, a Modi government at the Centre is not going to have too much luck in spurring the Indian economy. So why are the FIIs so optimistic about India? Well, considering the way Modi managed to transform Gujarat from a ho – hum state into a Mecca for growth and investment, they may be expecting an encore, though on a much larger scale, this time around. Moreover, after two gruelling terms of policy paralysis, uncertainty and logjams by a Congress government, the FIIs and the markets are rooting for a new BJP government at the helm.
    
     All that optimism has manifested itself into a market rally that might grow in proportions. If the BJP does form the government at the Centre, another 20 - 25% spike is on the cards but if the Congress manages to stay in power, all those expectations would die out, sending the markets down by around 20%, virtually erasing all the gains made in the Modi Trade. For now, the ongoing rally is certainly not across the board. The Sensex can be split into two parts – one part at a level of close to 50000, comprising the outperforming sectors such as IT and FMCG, and the other part lagging behind at around a level of 13000, comprising the down – and – out sectors such as infrastructure and power. The fact of the matter is that India’s markets are largely driven by foreign investors and retail Indian participation is only around 5%. Of course, when the markets begin a serious rally, common investors enter at high valuations, like a flock of mindless sheep, driven by greed and euphoria. Virtually every stock is pumped to outrageous and ridiculous valuations before the inevitable happens - the markets crash and common investors end up burning their fingers.
 
     As far as the Indian markets go, word has it that they are in the same place that the US markets were in the 1970s. What followed next on Wall Street in the 1970s was a bull run of epic proportions, one that lasted for many years. Of course, the market makers like Henry Kravis, Carl Icahn and Warren Buffett latched on to their big bets at an early stage and kindled the market rally. It was only then that the common investors and mutual funds entered the market like a flock of sheep and pumped virtually every stock out there sky – high. And needless to say, one fine day, all the hot stocks fell like skittles. At the end of the day, the market makers made their money and quietly exited before the crash and it was the common investors – Charlie Latecomer, Late Kate and Tailend Jimmy - who were left holding the baby and a basket of post – crash worthless scrips. If all that happened in America, who’s to say it won’t happen in India? As a matter of fact, it will.

     A crash is coming and that’s the bottomline ‘coz that’s what the markets do (and not ‘coz Stone Cold said so). Whether that crash is a few years away (following a BJP victory – led rally) or a few weeks away (following a Congress victory) is anybody’s guess. Nevertheless, the markets’ ability to recover is not something that should be doubted. After all, over the past two and a half decades, the Sensex and the global markets, for that matter, have faced multiple headwinds. And the markets have weathered the storm, survived and bounced back, despite everything that God’s green earth has managed to conceptualize, conjure and cast upon them - from the Gulf Wars to the East Asian financial crisis, from Y2K to the dotcom bubble, from 9/11 to 7/7, from tsunamis to earthquakes, from the 2008 financial crisis to the European sovereign debt crisis and finally, from three arduous rounds of Quantitative Easing, all the way to a twerking Miley Cyrus.

     The ongoing Sensex and Nifty rally may be music to every investor’s ears but if the Congress pulls out an upset victory or if the country’s economic fundamentals deteriorate any further, the rally is going to be short – lived and the markets will tank. Consequently, it will be the retail investor who would end up losing money. But of course, all that would transpire after the bull run that everyone is keenly awaiting and prophesising. Folklore has it that this bull run is going to be one for the ages, one across the board and unlike anything that India has seen in the past. It will be a record – setting bull run, fuelled by the retail investors and one that would take the markets to a level where they’ve never been before. But how long will the said bull run actually last?
     
     After all, even at this juncture, the valuations of many companies are already stretched, with quite a few trading at their life – time highs. The reality is that the rally, up until now, has been entirely FII – driven. Domestic investors and mutual funds are still sitting on the sidelines, playing a prudent game of wait – and – watch. Needless to say, sooner or later, they too will join the party and the markets will rally, full steam ahead. There will come a time when avarice and materialism will drive them into the markets, like a flock of sheep. There will come a time when greed will trump all rationale, valuations and logic. There will also come a time when every layman out there will propagate stock tips. Without a shadow of a doubt, there will come a time when every stock out there will have a one – way ride to the top. And on an ominous note, there will come a time when a crash will follow. And that’s neither a prediction nor a prophecy. That’s a spoiler.

     While we’re on the subject of similarities between the American and Indian markets, here’s some fodder for thought. America has already witnessed the arrival, domination and departure of Jordan Belfort. Wall Street will never, ever be the same again, after its encounter with its Wolf. And now, it’s India’s turn. 

     Get ready Dalal Street. The sheep are coming. 

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