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Tech funds: The determinants of the rally

Aug 28, 2000

The upsurge in tech stocks has led to the upsurge in the Sensex. While the selling on Friday put paid to the hopes that the Sensex would close over 4,460 (the level that technical analysts have been predicting , the future movements in the tech stocks (and consequently the Sensex) would be determined by the tech funds. It would be recalled that when the Sensex hovered around 6,000 in mid February, quite a few tech funds were launched. These include the Alliance Fund, IL& FS Fund and Prudential ICICI Fund. After the sell off in software, the NAVs of these funds fell quite drastically.

With the recovery in the market, the tech funds would be breathing a sigh of relief. However, the movement in these stocks would depend on the attitude of the fund managers holding software stocks.

If they were to sell some of their holdings, the current rally on the sensex would be quite shortlived. It is however, quite possible that may decide to hold on. After all the software sector seems to be the only one yielding bottomline growth of over 50% per annum. With the latest round of depreciation in the rupee, the revenue growth for the software companies in the coming year could well be maintained if not improved. Add to that the fact that online revenues of software companies situated in software technology parks and export processing zones are likely to get a tax holiday.

On the other hand the surge in international oil prices makes a rise in domestic fuel prices imminent. This could well put pressure on freight rates and consequently on the costs of cement and consumer goods companies.

Thus there is no immediate provocation for fund managers to sell their software stocks, for the moment at least. However, this would continue to remain a Damocles sword hanging over the market for sometime to come.


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