Tuesday, May 09, 2006

Gyan Prapti - Session 3

Gyan Prapti Session 3: The Markets...

Today I would like to talk about the stock market. I know it is not a really wonderful time - especially when the markets are crashing all across the ME. But then, hey, that's life.

I was really irked, intrigued and shocked to read a statement made in yesterday's Kuwait Times. The headline read that "There is no need to panic." Another read "Investors sell in illogical panic."

Ok, first things first. I am not on mission Kuwait Bashing.

The following is just my insight and my opinion. Having seen much of the development in the Bombay Stock Exchange as a spectator and a student, I just felt like it is my moral duty to point out the gaping differences.

For beginners, I am very uncomfortable with the P/E of the ME markets. The existing P/E for the BSE is around mid 20 ish.

A few months ago, the markets in the ME were trading at PEs around 30 – 40. Wow! Now, all I ask is one question – what have they got going in their economy that is bigger than what India has got?

I wait for the answers – some say investment in infrastructure some say development of the economy.

I say – “Bah!”

Investment in infrastructure – most of the economies of the ME are busy either – constructing more roads or constructing mega cities. Add with this some flavoring – there is now law in place for land property rights. The roads are leading to nowhere. The only industries benefiting from it are the automobile industry and the construction industry.

With no rights to own property, what is the point of buying property? Yes, it might be coming in Dubai. But, as of now, nothing is on paper.

Compare this with how India is doing – they are building roads that will form the backbone of inter – state logistics. And recently, foreign REMFs/REITs have been allowed to enter India. Wonderful!

Some would say that crude prices are hitting a high – so naturally the ME economies will do well. Yes, they will, I agree. But, how many oil companies are listed on the stock market? How much weightage do they give to the index? Find that out yourself.

The fact that most of the ME economies import everything from condoms to diapers, means that higher crude will lead to higher transportation costs (read shipping), which will be transferred to the end consumer – read higher prices for our daily use commodities.

The depth of the BSE is huge. There is a large number of companies listed on it, and the number of investors is also very high. Unlike the ME, where around 3 – 5 investors would be responsible for around 80% of the market trade. The markets do not have sufficient companies listed on it either. This makes them very risky. Therefore, a slight fall in the developed equity markets like the BSE will see amplified falls in the ME markets, as money would flow from one market to the other. Ask any investment banker, and he will willingly place a bet on the BSE rather than on a ME market.

There are many reasons for that. Here are some that are more prominent:

1. An active market regulator, SEBI

2. DEMAT – fast, efficient, paperless transactions

3. No entry or exit barriers. Currently in Kuwait, there is a minimum investment cap of KD 3000 (USD 9000 approx.) that an investor has to bring in to enter the market. In India, I can invest in the lowest denomination of the currency and can enter the market by merely buying one share worth 10 paisa (the lowest denomination is 1 paisa). 100 paisa = Rs. 1 and Rs. 43 = USD 1 (approx).
Get my point?

The point I am trying to get to is that the ME markets have very less to offer. They are very speculative. Thus, high volatility should be accepted as a norm.

No matter what economy, it can never justify a P/E of 40!
Note: Somewhere around October 2005, the Dubai Stock Exchange was trading at a P/E near 40.

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