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How fortunes change - Views on News from Equitymaster
 
 
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  • Jan 4, 2001

    How fortunes change

    Till yesterday, TMT stocks were virtual ‘pariahs’ and funds were busy reallocating their portfolios. The market movers took refuge in the brick and mortar companies. Oldies were in, tech was out. Then came the US Federal Bank’s decision to cut benchmark rates (0.5%-0.25%) The NASDAQ gained 14% and as a result of this one single development the bourses are back to backing technology companies.

    Though we have nothing against technology stocks, but the way our bourses reward or punish stocks is increasingly getting dependent on the fortunes of the US. Is this correct? Though there is no doubt that US is a dominant economy of the world and its decisions do make an impact on the global scenario, but one must also give some weightage to the fact that the two economies (Indian and US) are very different. While the US is a developed capitalist country, we are a huge developing economy, with a socialist hangover.

    Indian bourses reactions have been extreme in the last couple of years.

    When the TMT valuations soared, the bourses aped and followed suit. In the hype of getting ten baggers, the market movers went ‘tech overboard’, losing sight of the ground realities. No doubt, the technology stocks offered immense growth opportunities, but the valuations accorded to them were unrealistic. Market movers shunned old economy companies, and their valuations saw new historical lows. Then reality struck.

    As the NASDAQ tumbled, so did our bourses. This time technology companies kept touching new 52-week lows. The NASDAQ lost 40% in 2000. BSE Sensex followed suit and lost 26% in the same period. The last couple of months saw a rebalancing of portfolios by market movers in favour of the brick and mortar.

    Not once did anyone stop and think about what we were doing. When the old economy counters were getting hit, it was not as if their growth outlook was bad. It was simply that, their growth did not match that of the new economy counters. So almost all shunned the old economy. This is one extreme.

    When the new economy was getting battered in the last couple of months, at that time too, no one stopped for a second and pondered. The fact is that despite concerns on the US slowdown, frontline Indian software companies were showing no signs of slowing growth. Their prospects seemed as good as they were a year ago. So what changed? But almost all shunned the new economy. This is the other extreme.

    Today at the start of 2001, the bourses are again seeing a tech frenzy. This is good, as the total write off of the new economy was uncalled for. But one must bear in mind that as long as this sector’s outlook and valuations are dependent on the US moves, and not on the inherent growth characteristics of the Indian software sector, this rise can only be a bubble like the past.

    The only good sign is that though the markets have risen today with tech backing, the old economy counters too have contributed. One can just hope the lessons of 2000 are well learnt.

     

     

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