The bellwether Sensex closed at 14625, a 28 percent increase over the May closing at 11403. Markets responded very positively to the UPA winning more than their expected share of seats in the 2009 elections, and the promise of a stable government.

Undoubtedly, this brought cheer to the market but what is worrying is that a lot of investors responded with irrational optimism. We have seen such cycles before when the inexperienced investor has been taken for a ride. First, the prices of blue chips rises, which is followed by those of sound mid-caps and small-caps. As the market surges upwards in a sustained manner and investors earn very high returns, several small investors are lured into entering the market. However, by the time they enter, the prices of sound companies would be high and these new investors would start looking for low-priced shares. To cater to the demand of this unsuspecting group of investors, several unscrupulous promoters and manipulators activate the penny stocks and begin trading in them. Penny stocks are the shares of companies with no standing - financial or otherwise - which only begin trading in such market cycles.

Uninformed investors drive many such small scrips way beyond their fundamental value without realising the risks involved. What often happens is that those who manipulated the prices unload their shares for a sizeable profit. The stock price will then usually drop back down significantly because the stock was overvalued. This leaves the unwary investors holding these stocks that they bought at very high prices resulting in huge losses.

At such times, as a responsible broker, we do caution our clients on rumours, tips and penny stocks. Investors should continue to invest in such cycles but with caution. Our advice is to avoid panic selling and euphoric buying that are critical for a sustainable equity investment strategy.

The new government is likely to focus on infrastructure and other long term investments, and to get the GDP growth back to the 8-10 percent range. In the long run, it is very clear that the growth in corporate earnings will decide the stock market’s growth. The FIIs have started investing in Indian markets since there is reduced country risk on account of a stable government and stable economic policies. This has resulted in the market gaining faster than expected.

Once the market stabilizes, investors will rationalize between good and bad companies. Quality businesses run by quality management will, as always, remain good long term investment prospects.

Best Regards,
C J George
Managing Director,
Geojit BNP Paribas Financial Services Ltd