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US economy: Uncertainty continues - Views on News from Equitymaster
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  • Aug 23, 2001

    US economy: Uncertainty continues

    The Fed cut short-term interest rates by another 25 basis points in an effort to counter the year long economic slowdown in the US. The cut was anticipated. However, the weak outlook for the US economy disappointed the bourses.

    The weakness in the US economy persists and there might be rate cuts in the future (October 2 2001) when the Fed meets again. In the reaction to the statement the Wall Street (down 145 points) and the Nasdaq (down 50 points) headed south on Tuesday.

    What does this mean for the Indian bourses? This means that the corporates in the US will continue to monitor their costs (including IT spend) very closely. Therefore, the software sector will continue to face relative weakness (a 40% growth rate can be termed weak only in comparison to previous years 55%) in demand and therefore, the sentiment towards the software stocks will be similar i.e. weak. Consequently, the bourses are more than likely to be range bound. The elusive trigger might be the outlook given by the FMCG and auto companies, when they declare their results for the quarter ending September.

    Month Net traded
    value (Rs bn)
    Change compared to
    previous month
    Average daily
    value (Rs bn)
    Change compared
    previous month
    Change compared
    previous month
    Mar-01 488 -23% 20 -29.3% 7,011 -22.8%
    Apr-01 463 -5% 23 13.9% 6,606 -5.8%
    May-01 840 81% 34 45.2% 12,220 85.0%
    Jun-01 823 -2% 34 2.1% 11,936 -2.3%
    Jul-01 846 3% 33 -5.1% 12,575 5.4%

    Meanwhile, the 'interest' seems to have shifted to the debt markets. The volumes surged by a significant 81% in May 2001 (compared to April 2001) as investors shifted their money to debt markets ahead of the July 2 deadline for rolling settlement.

    Read our views on the debt markets/instruments.

    However, due to the lack of price discovery and lack of investing infrastructure, participating directly in the debt markets is a trying process. Therefore, the only alternatively left are the debt mutual funds.

    Security Coupon Trade value
    (Rs bn)
    YTM (%)
    CG2004 12.50% 1 7.3
    CG2013 9.81% 1 9.5
    CG2009 11.99% 2 9.0
    CG2008 11.40% 3 8.4
    CG2011A 11.50% 3 9.2
    CG2012 11.03% 4 9.4

    Top five securities on WDM - NSE (based on volumes) as on 20/08/2001

    The yield on the debt instruments looks quite tempting and in such an uncertain environment seems to be a sensible investment option. However, many stocks especially from the technology sector are at rock bottom valuations. Partly due the uncertainly clouding the prospects of the sector and partly due the vengeance arising out of losses investors have made on these counters. The case for investments in these stocks is the fact that the fundamental way we do business has changed. Technology no longer supplements business strategy but has come to be at the centre so much so that it will become the make or break element in the future.

    Therefore, the choice is between playing it safe and making the most of the pessimism that is haunting the bourses. If you chose to 'make the most', look for companies whose managements are willing to provide all the relevant information and know their business well. But please keep off those companies whose balance sheets require supercomputers to make some sense out of the numbers.



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