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Wag the Dog' or what? - Views on News from Equitymaster
 
 
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  • May 18, 2002

    Wag the Dog' or what?

    After holding up for the past one month, markets lost in the current week. The absence of any encouraging signs coupled with increased tensions at the border led to investors' exiting from equities. Although having recovered from the lows of October'01, the BSE Sensex and NSE Nifty still quote 9% and 7% below last year's levels.

    Tuesday's suicide bombings in Jammu have aggravated an already tense situation at the border. Ever since September 11 followed by the Kashmir assembly attacks, the military, as per reports, has been on alert mode. The two countries, technically, have fought three wars over Kashmir without a settlement to the dispute. The Kashmir issue is close to the hearts of both, Indians and Pakistanis. Therefore, neither of the camps is likely to compromise on their positions.

    Having said that, adopting a hard stand is likely to only prolong the current stalemate, which does not help the cause of either camp. Economic life of the people in the valley suffers. Escalation in tensions disrupts business momentum, stalling growth. And both countries bear a cost for manning border posts, the monies for which could otherwise be used for more development purposes. One concedes that while it all looks simple on paper, the ground realities are likely to more challenging. But one also needs to move ahead. A possible solution to end the status quo, so both countries can move forward, is to recognize the line of control as the international border. As per reports, Pakistan occupies approximately a third of Kashmir while India controls little less than half.

    Taking a leaf out of the movie 'Wag the Dog', the entire exercise could be an eyewash. The Government has not had a very pleasing 2002 - year to date. Individuals, especially, the elderly, rightly or wrongly, did not think too much of budget '03. Public's eye has been focused on the heinous crimes being committed in Gujarat, which throws doubt on the partisan character of the state administration. And the Finance Minister is caught in a potentially embarrassing situation. Sounding war calls could deviate attention of the country, especially the media, to a larger cause, relegating other issues to bottom of mind. And as bonus, score points with certain sections over the Government's bravado.

    As mentioned earlier, the benchmark indices, which have a strong influence on market sentiment, have wallowed over the past twelve months. The lacklustre performance has dampened investor spirits. Having said that, not noticed by many, the action has been in mid-cap and small-cap stocks. Over the same period, the BSE 100 declined by 5.5% while the BSE 200 climbed by 4.6%. Much of this outperformance has come about in the last four month. Since the beginning of February '02, point-to-point, while the Sensex has gone nowhere, the BSE 100 and 200 are up 4.4% and 13.3% respectively. With the economy trudging along, business prospects remain modest. Also, valuations of frontline stocks are not very compelling. This could have shifted investor focus to the broader market for search of new investment opportunities.

    Despite modest economic growth, few mid-cap and small-cap companies, which have undergone financial and business restructuring, are reporting healthy financial performance. Also, the serious start to Government divestment in February '02 seems to have triggered the mid-cap & small-cap rally. The run is further facilitated by a similar global equity market trend. Should it be more 'wag the dog' we could see the benchmarks recoup their losses of last week.

     

     

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