Avoid herd mentality, Economic Survey tells investors


New Delhi : Indian bourses performed best among emerging economies with a market capitalisation of $1,683 billion, the Economic Survey for 2007-08 said Thursday, while cautioning investors against “herd mentality” and “panic”.

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“Individual investors need to take informed decisions and remain cautious,” said the annual report card on the Indian economy, which was tabled in the Lok Sabha by Finance Minister P. Chidambaram.

“They would do well to resist commonly observed herd mentality and panic in their buying and selling operations,” said the survey that otherwise lauded the performance of the Indian capital market and its regulatory environment.

The survey’s reference was to the volatility in the Indian capital markets in recent weeks, and in October last year, when fear and panic selling led to one of the steepest falls in market indices in many years.

“As stock indices scaled new highs, investors’ wealth – as reflected in market capitalisation – also rose correspondingly,” said the survey, while calling for well-calibrated policy initiatives to prevent irregularities.

“Investors’ awareness is equally important for market stability as investment in equities could be guided by short-term speculative gains.”

It said while the India’s market capitalisation was 150 percent of the country’s gross domestic product, it was 137.3 percent for China, 104.4 percent for Japan, 116.2 percent for South Korea and 128.8 percent for the US.

The market capitalisation nearly doubled last year and the price-to-earnings ratio was at 27 percent at the end of December. This, too, was higher than most emerging economies, including South Korea, Thailand, Malaysia and Taiwan.

In absolute terms, however, India’s market capitalisation was lower than that for China at $4,459 billion, Japan at $4,535.08 billion and the US at $17,773.05 billion, says the survey.

The survey said the interests of domestic and foreign investors in the Indian capital markets would continue, despite the possible subdued global markets, thanks to the strong fundamentals of the economy and high growth.

“In the short term, expectations of higher relative returns from investment in India, favourable risk perception of investors and improved global liquidity would help the country in being an attractive destination for investment.”

The survey also said that the interest of investors would be sustained by the strong expected corporate earnings, supportive policy initiatives, as was evidenced by the pickup in resource mobilisation by mutual funds.

“The continuation of initiatives towards policy reforms in the area of pension funds would provide the credibility to the government’s efforts to carry forward the economic reforms, auguring well for the capital market as well.”

According to the survey, a total of 100 companies accessed the primary market, as against 75 in the previous year to raise Rs.587 billion ($14 billion), of which Rs.339 billion ($8.5 billion) was in primary issues.

The net flow of savings into mutual funds also increased by over 30 percent in 2007 to Rs.1.4 trillion ($35 billion), even as the number of registered foreign funds rose to 1,219 at the end of December from 1,044 in the previous year.