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Stock markets: A change of sentiment

May 20, 2000

The BSE Sensitive Index (Sensex) has declined over 46% after it hit its all time high earlier this year. The foreign investors (see graph) have been pulling out money from the Indian markets. Mutual funds are said to be facing redemption pressures. The bears are out on the street. The bulls, if any, are nowhere on the horizon. What to expect in such a scenario? A change of sentiment or a persistence of the downward trend? This is precisely the question that is vexing not just the retail investors but also the larger players in the market.

Let’s look into the reasons for this pessimism. First came the budget with an announcement of a hike in dividend tax to 20% and a gradual withdrawal of tax incentives to exporters. Next came the scare that foreign investors that were operating out of Mauritius may have to pay up tax as they were flouting norms. Then came the news that drought had severely affected parts of the country and there was likelihood that the monsoon may not be ‘normal’ this year. Finally the nail in the coffin – Morgan Stanley Capital International (MSCI) reduced India's weightage to 7.45% from 9.08% in its key index.

Along this entire period from March onwards, there was another key development. A crash in the NASDAQ. This significantly affected the perception towards technology companies (which then accounted for 30% of the weightage in the BSE Sensex).

The bulls (wherever they maybe) have little to shout out. Most of their reasoning is to do with the real economy. The economy is expected to grow 5.9% in FY00 and accelerate its growth to approximately 7% in FY01. Industrial production is up a healthy 7.9% between April and February (the manufacturing sector grew at a faster 8.8%). Corporate earnings reports have turned out to be better than expected.

Both sides have their views, but for now, it seems that the bears are definitely in control. Some brokerages have even gone to the extent of predicting a Sensex of 3,700 in the near term (approximately 10% lower than existing levels). However, there is a breed out there that is only now getting interested in the markets.

The ‘value investors’ are salivating at the attractive valuations in the markets. Some consider it a second opportunity to board the technology ‘bullet’ train. These stocks (atleast the leading ones in the sector) are expected to post earnings growth of 40 – 50% well into the future. This is still much higher than the average rate. Others are looking at real ‘old’ economy stocks that will benefit from the economic recovery. However there is one unanimous opinion. The markets are unlikely to show the kind of euphoria they displayed in February this year. Also, a number of stocks will not see their highs for some time to come.

It is difficult to predict the course of the markets in the near term. But one thing is certain. Even in a bear market there is a good investment opportunity. And even this market offers many such opportunities. It is for the investor to grab this opportunity and not let near term market movements unnerve him.

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