India Joins the 5-Digit Quartet

THE FOREIGNER GIVETH. Then he taketh away. Or so it is in the case of India’s main stock index, the Sensex. For those who have no clue, the Sensex is a bundle of 30 of the largest stocks on the Bombay Stock Exchange. It is the DJIA of India. And in the last three or four years, it’s been one of the hottest places in the world to put your money – thanks in large part to an onslaught of institutional dough.

While I visited India earlier this month, the fiery Sensex finally poked through mythical – and psychological 10,000 mark. She joined the illustrious bedmates of the Dow, Hong Kong’s Hang Seng and Japan’s Nikkei.

Encouraged by the rampant growth in India – and the corresponding gains in the stock market, foreign institutional investors shoveled money into the Indian market throughout the Sensex’s frenzied seven and a half month run from 7,000 to 10,000. (Here one wonders whether the foreign investment forced the same run up that it tried to harness and profit from.)

Now you may ask how it could possibly happen that a short time of heavy institutional ramping could affect an entire market. Here’s how. Even though the Bombay Exchange is the oldest stock exchange in Asia, its 3,500 companies have a combined market cap of only $466 billion – compared to GE’s cap of $355 billion and Microsoft’s massive $255 billion. So, with a market that small you can see why frothy inflows of buying can force some upward momentum.

Which brings us back to our psychological milestone of 10,000.

In a self-prophetic swoop, the foreign institutions started taking profits after the Sensex glided over the 10,000 hurdle. Last week, for the first time all year, foreigners became net sellers, taking profits just as cavalierly as when they pumped money into the market months before.

Funny how that works.

And so the Sensex closed on Friday in the comparably somber quadruple digit realm. Oh, sometimes membership in the ten-thousand club can feel so fleeting and cheap! But will the Sensex stay in the 4-digit realm?

In short, I have no idea. What I do know is that the average company on the Sensex is expensive at nearly 20 times earnings and four times book. Normally that means India’s favorite exchange is due for a steep correction. But who knows?

If the basket o’ BSE carries on its 5-year average annual growth rate over the next year, in Feb ’07 we’ll see it solidly in the 5-digits with a tasty score of 13,567. That might be pushing it a little, though…let’s compare it to it’s five-digit friends.

Iif the Sensex chose to imitate the DJIA, it would stumble around in a sideways stasis for the next 5 years…or if it followed after the Hang Seng’s 5-year avg. annual path, we’d see 10,221 in Feb ’07. Or, to slap a Nikkei comparison on the Sensex, it would lose 33% in the next 2 years only to climb up to 12,002 in 2011.

Or, everything could simply fall apart in the event of widespread scandal(s) – it IS India we’re talkin’ about here. Your guess is as good as mine…it’s tough to accurately predict where an index will go based solely on its recent past performance. It’s also not perfectly relevant to compare the Sensex to the other indices in the illustrious 5-digit club. But we use what we have and go from there.

That said, the foreign institutions will probably start pumping money back into India if there’s a substantial pullback. They will most likely jump back in once some value re-enters the market.

After all, India has a savings rate of 10% – massive compared to America’s – and one wonders what would happen if the common Indian family tapped into some of that rupee stockpile and plugged it into the chugging market…

Please write in to me to give your prediction of what the Bombay Stocks Exchange index will do over the next one and five year horizons: greg@whiskeyandgunpowder.com

Until then, I leave you with a quick photograph of some non-exchange related business I did in India. If you can guess where I am, you get a free one-year Resource Trader Alert subscription! Shoot me an e-mail…

P.S. My colleague Sala Kannan has recently completed a special report on India that contains 4 picks that have climbed up right along side the Sensex.

Quote(s) of the week: “$8,248,610,906,449.65” the National Debt, via http://www.publicdebt.treas.gov

“About $250 billion of China’s reserves are in U.S. Treasuries. China’s purchases “put Pimco’s Bill Gross to shame and contribute to low yields” in the world’s biggest economy, said Nouriel Roubini, a former U.S. Treasury official who’s now chairman of New York-based Roubini Global Economics LLC.” ~ Bloomberg.com

Headline(s) of the week: “In Japan, Day-Trading Like It’s 1999” ~ NY Times

“Even the President’s Budget Suggests We Are Below Full Employment” ~ AngryBear.blogspot.com