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Left, right and Centre!

May 15, 2004

What better words can describe the scenario this week on the Indian stock markets? There was selling witnessed left, right and centre on the bourses, which saw the markets freefall during the week. While the BSE-Sensex lost a whopping 10.6%, the NSE-Nifty beat the Sensex losses at 12.3%! While there were some indications that political stability was the key that would lure back investors to the markets, it doesn't seem so from the behaviour of the markets this Friday. This was primarily owing to the nervousness that seems to have set in with respect to the agenda of the new parties at the Centre.

The markets opened the week on a substantially weak footing influenced by an opinion poll for the fourth phase of elections (May 10), which expressed doubts over the current ruling coalition garnering a majority. While the opinion polls may have been dead wrong in predicting a Congress-led government coming into power, they definitely seemed to have set the cat among the pigeons by indicating that it was going to be difficult times for the NDA-led coalition in these elections. However, taking a cue from the opinion polls, investors went on a selling spree on Monday on fears of the same coming true.

Tuesday was another day of bear carnage on the bourses as the exit polls created immense uncertainty with respect to the government at the Centre with signs of a hung parliament. This unnerved investors who preferred to stay away from the markets, until signs of some political stability set in. Wednesday's trading saw some amount of cautiousness as investors awaited election results. However, panic took over on Thursday morning as the political uncertainty was wiped out in the most unexpected fashion! Congress was forming the next government! The indices opened 4% lower, however, soon some rationality set in and bargain hunting at lower levels pushed the indices into the positive territory.

But this was not to continue on Friday. It was absolute mayhem on the bourses as selling was witnessed across the board. The extent of weakness can be gauged from the fact that for every 1 share that advanced on the BSE, there were 9 shares that declined. Further, just to put things in perspective with respect to the magnitude of the fall during Friday's trade, it was the second biggest fall for the Sensex (down 6.1% or 330 points), with the top honours continuing to remain with the fall on April 4, 2000 when the Sensex tumbled 7.2% or 361 points in a single session. In the case of Nifty, however, Friday's (May 14, 2004) fall was the biggest over at 7.9%! The fall on the indices over the last few trading sessions has been aggravated owing to the selling from the FII community who seem to have been equally disappointed with the political developments in the country (see chart above).

Key gainers over the week (NSE-50)
COMPANY Price on May 7 (Rs)Price on May 14 (Rs)% CHANGE52-WEEK H/L (Rs)
BSE-SENSEX 5,6705,070-10.6% 6,250 / 2,960
S&P CNX NIFTY 1,8041,582-12.3% 2,015 / 943
HCL TECH2852942.9%345 / 118
RANBAXY1,0271,0330.7% 1,171 / 625

But, why did this happen? The cause for the sell-off this week is not difficult to assess. In simple words, it was owing to the new possible Lok Sabha formation. While the Congress and its allies have garnered 216 seats, the Left parties have managed to win 59 seats with the balance going to NDA & allies (186 seats) and others (78 seats). It must be noted that 272 seats are required for a majority and the most likely partner for the Congress are the Left parties, which would help them garner the majority. However, this combination has fuelled concerns relating to worsening fiscal deficits and a slowdown of reforms, especially to the divestment process, among others.

Key losers over the week (NSE-50)
COMPANY Price on May 7 (Rs)Price on May 14 (Rs)% CHANGE52-WEEK H/L (Rs)
HPCL468331-29.3% 542 / 285
SHIP. CORP.12086-27.8% 203 / 61
GAIL227165-27.5% 312 / 80
OBC310226-27.0% 367 / 100
BPCL470357-24.1% 533 / 225

In fact, some indications have already trickled in pertaining to these issues. One being the newly appointed Andhra Pradesh state government's act of providing free power to farmers and waiving of their power related arrears. Early indications are that this would cost the state exchequer Rs 33 bn over the next 5 years. The other has been a recent statement from one of the possible allies of the Congress with regards to the dismantling of the divestment ministry, which further re-affirms their stand against the divestment process. The effect of this was clearly visible on PSU stocks, especially HPCL and BPCL (see table above). Further indications of the possibility of an amendment in the Electricity Act 2003 and widening of tax net to cover more sectors (software?) supplemented the investor nervousness.

So, is everything over? Now what for equity investors? In our view, the next 2-3 months will define what course the incoming government is going to take and its stance on various policies. However, what we feel is that after the initial dithering, the new set of policy makers too will have to keep their steps continually in line with globalisation. So invest cautiously if you will, but do it with a 3 to 5 year perspective, irrespective of the government at the Centre. Build your portfolio selectively and stagger your investment decisions in equities. See panic selling as an opportunity to pick and choose. We remain bullish on India over the long term. Happy Investing!

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