Ask the man on the street what made the Sensex zoom by 25 per cent in 2012, and he will probably reply: ‘Reforms’. Most people now believe that the market rise, and the deluge of foreign money that fuelled it, came because of the government shaking off its notorious policy ‘paralysis’.
But delving deeper into the sectors and stocks that gained suggests that the link between policy change and corporate prospects was, in many cases, tenuous.
Take the banking sector, a top gainer for the year. The steep interest rate cuts that the sector was hoping for from the beginning of the year never materialised.
Instead, the RBI reduced the Cash Reserve Ratio and pushed through regulatory changes that actually tightened capital and provisioning norms for banks. This kept costs for the sector quite high, at a time when corporate defaults were rising too.
The markets responded to this by marking up private sector banks and betting less on the beleaguered state-owned ones, but both sets of stocks gained nevertheless.
The realty sector’s 55 per cent surge is not easy to explain either. While realty stocks surged on the hope that lower interest rates would fuel demand for property, actual interest rate reductions proved to be too small to matter. Total sales for the dozen companies that make up the BSE Realty index plummeted by 17 per cent in the first half of 2012-13, with net profits shrinking 5 per cent.
Lending to the sector remained tight, requiring players to sell assets to reduce leverage.
Hope and relief
Then, there were policy announcements which were quite important, but haven’t yet translated into action on the ground.
The go-ahead to Foreign Direct Investment in retail and aviation had the respective stocks partying, but the actual infusions of capital are still a good way off.
The pharma sector is a case where the expected policy change — price controls on more drugs — was expected to be adverse. But these stocks soared because the proposed policy looks to be less negative than expected.
With pricing control formula yet to get the Supreme Court’s blessings, uncertainties for the sector haven’t abated. Sectors such as FMCG and consumer durables, of course, are untouched by policy or reforms and have still recorded hefty gains of 47 per cent each.
So did policy changes matter in 2012? They did, but not in the way one would assume.
Even as business prospects remained muted, in some cases, stock prices seem to have surged in the hope that recent policies will make things better.
Or, in sectors such as pharma, it was relief that policy changes are now over and done with.