On the face of it, both statements by fund managers in Mumbai are diametrically different. Yet, both gentlemen, the first an executive with a foreign brokerage, and the second a CEO of a domestic brokerage, know their markets.
The first statement is easy to understand, namely, that with reforms, the economy will do better and so will the markets.
The second is a bit convoluted but essentially states that since there are less stocks than there would have been in an active privatisation scenario, stock prices are going up -- after all, during the NDA regime, additional stocks of five PSUs got floated and these included IPCL, IBP, CMC, Dredging Corporation, GAIL India and ONGC, which together raised Rs 14,000 crore (Rs 140 billion) from the market. While divestment was a trigger for the market rally it doesn't explain the full story.
A good way to look at how the market's reacted to the NDA's economic reforms and the relative non-reforms' agenda of the UPA, is to look at how key indicators have performed. March 31, 2003 is a good date to take since this is when corporate India started showing the first signs of a turn-around.
April 23, 2004 is the next date since this is when the market first got to know the NDA wasn't coming back to power. The third, September 19, 2005, is the latest for which data is available in the form required.
Between March 31, 2003, and April 23 the next year, the Sensex rose from 3048 to 5925, and the market capitalisation from Rs 560,088 crore (Rs 5,600.88 billion) to Rs 10,69,405 crore (Rs 10,694.05 billion) -- we've used a common list of 1880 traded stock as several new stocks like Jet Airways got added to the market in 2005 and, therefore, distort the sample. That is, during the last year of the NDA government, the Sensex almost doubled while market capitalisation rose by around 90 per cent.
During the UPA's tenure so far, the Sensex rose to 8444 and the market capitalisation to Rs 19,87,722 crore (Rs 19,877.22 billion).
In percentage, the rise is lower, around 43 per cent in the case of the Sensex. In terms of market capitalisation, the rise is around 86 per cent and the period of comparison is also longer.
The valuation of the manufacturing PSUs between March 31, 2003 and April 23, 2005 rose by Rs 1,40,391 crore (Rs 1,403.91 billion) or 104 per cent -- from Rs 1,34,690 crore (Rs 1,346.90 billion) to Rs 2,75,081 crore (Rs 2,750.81 billion).
Since then, under the new government, PSU stock valuation rose by Rs 1,42,453 crore (Rs 1,424.53 billion) -- from Rs 2,75,081 crore to Rs 4,17,535 crore (Rs 4,175.35 billion) on September 19, 2005.
However, since the base was higher, in percentage terms, the rise is only 51.8 per cent. So, it may not be entirely correct to give credit to the NDA government for the PSU rally.
Similarly, the rally in bank stocks, too, has gained further momentum under the UPA government despite its failure to bring down the government stake in public sector banks to below 51 per cent due to stiff resistance put up by the Left.
The market capitalisation of the PSU bank stocks rose by Rs 42,612 crore (Rs 426.12 billion) between March 31, 2003 and April 23, 2004 (from Rs 34,279 crore to Rs 76,890 crore). Since then, under the UPA, it has risen to Rs 1,30,303 crore (Rs 1,303.03 billion).
Once again, on account of a higher base, the percentage growth during the UPA is lower at 69 per cent against 124 per cent growth under the NDA rule.
When it comes to the valuation growth of private sector firms, even in percentage terms, this has risen dramatically during the UPA tenure so far. Under the UPA government, the market capitalisation of private sector firms rose by Rs 722,450 crore (Rs 7,224.50 billion), or 100 per cent. This is against a 79.8 per cent growth in valuation of these firms under the NDA regime.
When it comes to issuance of fresh equity, the UPA wins hands down. According to data from Prime Database, there were a total of six issues of fresh capital and offers-for-sale in 2002-03, adding up to a total of Rs 1,038 crore (Rs 10.38 billion) and another Rs 431 crore (Rs 4.31 billion) of rights issues.
In 2003-04, the last NDA year, the number of fresh capital and offers-for-sale rose to 29 and the capital raised to Rs 17,821 crore (Rs 178.21 billion); in addition, Rs 1,006 crore (Rs 10.06 billion) of rights issues took place. In 2004-05, the first UPA year, the number of fresh and offers-for-sale remained the same at 29, but the amount raised rose to Rs 21,431 crore (Rs 214.31 billion) and the rights issues rose to Rs 3,615 crore (Rs 36.15 billion). In the period till August this year, Rs 5,994 crore (Rs 59.94 billion) was raised through fresh capital and offers-for-sale and another Rs 896 crore (Rs 8.96 billion) through rights issues.
The FII flow, which was a paltry Rs 3,576 crore (Rs 35.76 billion) in 2002 rose to Rs 30,792 crore (Rs 307.92 billion) in 2003. In 2004 it rose further to Rs 38,413 crore (Rs 384.13 billion) and up to September 19 this year, the net FII flow into the equity market has been Rs 36,076 crore (Rs 360.76 billion).
What's been driving the market is a combination of great global liquidity as well as sharp earnings growth in corporate India, both of which to a large extent appear independent of which party is in power.