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Where to from here?

May 4, 2002

Bourses have been lacklustre over the past fortnight with the BSE Sensex rising marginally. After touching highs in February, prior to the budget, it has only been downhill. While not taking anything away from the FM, the Gujarat imbroglio has eroded market capitalisation. Bourses were able to recoup all the losses registered at start of the week. After sliding for almost eighteen months from March '00 to the lows of September '01, the sharp bounce back seems to suggest a trend reversal. We could be in a recovering bull phase, as markets broke resistance at 3,300 levels and is finding support once again at those levels. We had mentioned that much of the slide since March' 02 could be due to political uncertainties, Mideast crisis and rising oil prices. The Gujarat debate has concluded though not with our desired end. Crisis in the Mideast has cooled down, as Israel pulls out from more towns. Considering the developments, one would have expected oil markets to correct further. But oil prices remain at $26/ barrel. One can expect prices to weaken, as the western hemisphere enters the slack consuming summer months.

Having said that, the calm in Israel-Palestine tensions is fragile and it seems, as always, broking peace is an uphill task. All one needs is a right wing extremist from either side to disrupt any progress on compromise. The situation has only deteriorated after the assassination of Yitsakh Rabin by an Israeli extremist, which sets off conspiracy theorist. Do the parties really want peace?

Double dip theorist must be all smiles currently. Over the past seven weeks the Dow has registered 5 losing weeks and has shaved off 600 points. The blue chip benchmark did close below the psychological 10,000 mark the week before. NASDAQ cannot seem to untangle itself from the troubled internet and telecom stocks. The tech laden index has fallen in 7 of the last 8 weeks. While academics debate whether indicators point to a recovery or not, the market recognise the one and only indicator - corporate profits. With America Inc. reporting a poor first quarter, market analysts have pushed forward their expectations of a recovery once again. However, a possible risk continues to be high valuations, which could be in anticipation of an earnings recovery. But while earnings do recover, valuations could revert to the mean, dampening stock/market performance. Therefore, local sentiment may not get a boost a'la 2000.

The voting in Rajya Sabha over Gujarat is likely to pass through smoothly. Markets have not been impressed by the performance of corporate India and look forward to data corroborating a turnaround in the economic growth. Having said that, the winning bid for IPCL is likely to be announced next week, which could create excitement. The Government continues to move ahead on the disinvestment front, which seems to be the only near term trigger. From current levels the risk-reward looks favourable.


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