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NASDAQ surpasses 4,000 mark

Jun 21, 2000

NASDAQ, the global benchmark technology index went on to close above the 4,000 mark for the first time in nearly two months. It is still 20% below its all time high close. The NASDAQ, which had touched a low of 3,164 on 23rd May, has rallied 900 points in the last 18 trading sessions. The tech stocks seem to be staging a comeback. But should one permit him into believing that the worst is over for technology stocks.

The doomsayers are still there, predicting a meltdown on NASDAQ and NYSE. Some of the reasons are apparent. Valuations, as earlier this year, seem to get ahead of themselves even as concerns pertaining to inflation and interest rates continue to be played down. Well it's pretty simple, the irrationality of the markets that is. Just 18 days back the valuations seemed absurd with all and sundry screaming 'SELL'. Since then however the markets have rallied 900 points. Probably due to the easing of some growth indicators in the US, which could lead the Fed to defer any rate hike. But, by the way, were it not these same bulls that said technology companies were anyway unaffected by interest costs.

The Indian markets may probably share in the resurgence of enthusiasm on the technology bourse. The reasons may however not be wholly unjustified. Indian technology companies (which are largely service oriented) are growing at an average of over 50% per annum. They are likely to sustain this for the next four to five years (the large companies may however witness a slowdown). A large chunk of their earnings come from the US - exchange depreciation thus benefits them. They have a competitive advantage over most countries (although China is catching up fast). And finally they are continuously moving up the value chain after having initiated with Y2K compliance related work.

Valuations. That's what is causing the concern? How many Rupees (in current terms) are we willing to pay for future earnings of a particular company. The business may be good. The valuations may not. Even after the recent precipitous fall in prices of technology stocks, some reckon that valuations are on the higher side. This means that a large part of the anticipated earnings of a company are reflected in today's prices. If anything were not to turn out in the anticipated way, current prices would look grossly overvalued.

Well, as you would have realized, making a call on current valuations is all about the perception of investors. If most think that business will be even better, stock prices will appreciate, notwithstanding the short-term glitches. On the other hand, if there were pessimism, as witnessed recently, even current valuations would seem absurd. So, put on your thinking cap and make the call. All the best!

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