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Of mice and mobiles

By Devangshu Datta
December 31, 2005 13:40 IST
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Mondays to Fridays, Biju Shetty (not his real name) dons a multi-coloured silk lungi after breakfast and walks 10 metres from his front-door to his office in the converted garage.

There, he settles down with three mobiles, two TVs and three wi-fi enabled PCs. The TVs are generally on mute, he enables volume only if the talking head looks interesting.

On one PC, NSE stock prices flow in colour-coded patterns.  On another, MCX commodity futures prices scroll down. The third displays futures and options trades. Shetty's eyes flicker from screen to screen, his hands play with the mice and mobiles. Occasionally he freezes, hunches and places an order.

Biju works alone, fuelled by filter coffee, murrukoo and biscuits. He sends many SMSs. On voice-mode, he speaks the abbreviated lingo that is the badge of the financial community. Companies are referred to in cursive ways and only the last two digits of quotes are mentioned. Shetty and his ilk will debate the wisdom of buying "Bank" at "89" when the screen says State Bank of India is trading at Rs 889.

He is one of the most successful retail investor-traders around. The 40-something IIT-ian chucked up a career in power equipment and entered trading full-time after he made his first fortune punting on IT stocks in 1999-00.

In the here-and-now, he's at the cutting edge of research and technology. He arm-twists his brokers and relationship managers into sending research reports. He uses his alumni network to check details. He trades online commodities futures as well as F&O and equity, a triple-play rare for individuals.

The day after tomorrow

Circa 2005, most Indians consider Shetty an outright gambler, despite consistent returns. Most Indians lack faith in equity. Circa 2005, the RBI reckons just 1.5 per cent of household savings are invested in equity plus mutual funds.

By 2010, there will be many Shetty-clones (though they might differ in sartorial tastes). Greater Net penetration will spawn electronically networked traders, using sophisticated neural network and fuzzy logic programs. The allocation of household savings to the financial markets will increase.

But the bulk of the trading will still be institutional. That's the way it is in sophisticated markets and India is among the most sophisticated markets in the world.

This much, one can say with certainty. The following is a patchwork of guesses and large assumptions.

Global outlook:

Mark Faber, the Dr Doom of the Gloom-Boom-Doom reports, believes that the US's profligate spending will trigger a huge recession. Let's hope he's wrong!

Dr Faber also believes that commodities and precious metals will be among the best-performing assets and he's not the only one. Growth in India and China will lead to higher living standards across a combined population of 2.5 billion. Global demand will spike. More of everything from steel and aluminium to coffee and crude oil, gas or suitable energy substitutes will be required.

Let's assume the US economy doesn't collapse, the Eurozone and Japan continue to grow albeit slowly, and "Chindia" keeps growing at projected rates. Let's also assume that global supply ramps up to meet rising energy demand.

Where does that lead Apna Bharat?

Domestic outlook:

India should grow at GDP rates of 7-8 per cent per annum through 2005-2010. The economy will be roughly one-and-a-half times as large in 2010. It will have better infrastructure, a respectable road network, acceptable ports and merely poor instead of abysmal airports.

Power generation should have doubled and the national transmission grid will ensure deficits are plugged through power-trading. There will be 3-4 times as many phones and ten times as many Internet connections. Vehicle penetration may have quadrupled.

The middle class will have doubled in size or perhaps tripled, depending on definitions of "middle-class". Large chunks of the citizenry will be prioritising house and car payments (and quite a few will still be struggling to ensure two square meals a day).

But many more people will have savings to invest in financial assets. Assume taxes remain equity-friendly. Long-term capital gains incidence and no double-taxation on dividend income are very nice backdrops.

Will you be able to walk into a bank and exchange rupees over the counter for Euros? This is a hot-potato. It was promised in principle (without any target date) in the 1993 Budget.  If Dr Singh tries to deliver on that (long-forgotten?) promise, the Left will produce another of its celebrated tantrums.

However, the limits on holding external assets have been relaxed and are likely to be further relaxed. Given full or relaxed convertibility, Indians could trade external assets with greater comfort. Imagine a scenario where Shetty and his tribe unleash their considerable skills on Simex, the HangSeng and the Nasdaq without worrying about piddly $100,000 limits. The Indian forex market would also go through a paradigm shift.

India Inc.

There will be many new, high-growth businesses in 2010. Simply servicing the GIMC will be a recipe for high growth. Also, most Indian corporates already have their tentacles firmly hooked into the global economy. Some are already global "best-of-class". By 2010, many will be Fortune 500 aspirants.

This guarantees a vibrant stock market. New businesses raise cash through public issues and even old businesses may prefer to corporatise through IPOs.  In 2005, listed Indian corporates generated about 5 per cent of GDP. By 2010, I suspect listed corporates will produce close to 15 per cent of a much-expanded GNP.

Investments will flow comfortably into such a strong economy and stockmarket. Portfolio investors pumped $10 billion or thereabouts into Indian equity in 2005. In five years time, they could easily be investing three times that.

Numerology

Okay - here comes the Rs 64 crore (Rs 640 million) question. Where will the Sensex be in December 2010? It's at 9,300 as I write.

Rakesh Jhunjhunwala talks about Sensex 25,000 in 2010. Milind Karandigar offers the very wide limits of 16,000-40,000 as a likely trading range. Note that these predictions are not mutually exclusive though RJ is exclusively a fundamentalist while MK is a committed wave-theorist.

Let's deconstruct. A move till 16,000 would mean a compounded annual return of 11.5 per cent for the Sensex (neglecting dividends).  Sensex 25,000 implies that RJ expects a CAR of 22 per cent. A move till 40,000 would require an amazing CAR of 34 per cent.

In the past 25 years, the Sensex has risen at around 20 per cent per annum. So, that seems a sustainable rate. If GDP growth accelerates, as does the share of GDP attributable to listed corporates, that long-term rate can be improved upon.

In the past five years, the Sensex has risen at marginally less speed, around 19 per cent per annum. In the past three years though, it has rocketed up at the ludicrous rate of 40 per cent. If it grows at 20 per cent, by 2010, the major index will be trading at 23,000-plus. If it somehow maintains the 40 per cent rate, it will hit 50,000.

Are these numbers pie in the sky for a value-conscious investor? In terms of PE ratios, the Dec 2005 Sensex trades at 18-19 and earnings have grown at about 22 per cent in an economy where GDP has grown at 7 per cent.

If GDP growth does accelerate and corporates increase their share of the economic pie, a Sensex rise at 20-25 per cent over the next 5 years doesn't seem unreasonable.  Sensex 50,000 or even 50,000 does seem a little too optimistic. Stranger things have been known to happen however.

Conclusion

There are an entire set of sweeping assumptions above. Before buying it wholesale, recall the favourite saying of FBI profiler Jack Crawford in The Silence of the Lambs: "When you assume something, you make an ass of you and me".

Looking through a glass darkly, none of the above might happen. Dr Doom's prognosis or worse could come true. India could dissolve into a dictatorship of either left or right wing doctrine and we could be struggling to survive a tyranny of collective mediocrity.

Keep the faith.
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Devangshu Datta
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