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All's not well - Views on News from Equitymaster
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  • Jun 16, 2001

    All's not well

    Storm clouds gathered over the bourses during the last two days of the previous trading week, as the markets went into a tailspin. The week's entire losses were recorded during these two days. The commencing of earning warning season on the NASDAQ led to the slide on this side of the Atlantic.

    Over the next two weeks, as U.S companies prepare to declare their 2Q financials, the markets are expected to move into the peak of the warning season with corporates announcing revenue and earning guidance for rest of the year. The expected bad news from corporates, as the economy remains in the doldrums, could send the market aggregates dropping even further. In the first quarter of calendar year 2001 the belief was a revival in the economy during the second half of 2001. However, participants are now of the opinion that a revival is not expected before 4Q of this calendar year.

    During intra-day trading on Friday the NASDAQ dipped below 2,000 levels. The spate of expected warnings could send the tech-laden index below the psychological barrier, towards the lows of April '01. The only positive development on the economy front could be the further easing of interest rates by the Fed. Markets earlier expected an interest rate cut of 25 basis points in June. However, with poor guidance from corporates and economic indicators exhibiting weakness the fed is expected to cut interest rates by 50 basis points. The Fed meets next on June 27.

    The external developments, however, do not augur well for the domestic indices and especially for the market's favourite punching bag, the technology sector. Difficult days seem to have befallen the sector. From the heady growth rates recorded in the past two years, growth in FY02 was pegged at 40%-45%. The industry association, NASSCOM, recently revised downwards the industry growth figures, yet again, to 36%. Software exports are expected to grow by 40% to Rs 8.3 bn while domestic sales by 33% to Rs 2.7 bn. Software exports in FY01 registered a growth of 55%. The geographic break-up of software exports in FY01 was 62% to U.S & Canada and 38% to the rest of the world.

    As per popular opinion, the software sector is expected to benefit from the slowdown tightening its grip over the U.S economy, as corporates stress on outsourcing to cut costs. However, an overall cut in tech spending by corporates could hurt domestic software industry growth. The stock price of tech bellwether, Infosys, has weakened considerably over the past fortnight. Increasing concerns over the U.S economy, a falling NASDAQ and investors losing faith in technology have led to the slide. However, the worst does not seem to be over for the stock. Nortel Networks, part of Infy's top five clients, recently issued a huge profit warning for 2Q. Revenues for the quarter are expected to come in at $4.5 bn against market estimates of $6.2 bn. 2Q expected losses are a whopping $19.2 bn. The company plans to retrench another 10,000 people.

    The net outstanding positions on the BSE have declined marginally over the week from Rs 6.5 bn to Rs 6 bn. Lack of any guidance from auto major, Telco, could indicate no near term improvement in the economy, impending liquidation of outstanding positions, a weakening NASDAQ and declining domestic tech valuations (TMT - 16.9% weightage in Sensex) could keep the bulls at bay.



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