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Drought hits street - Views on News from Equitymaster
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  • Oct 5, 2002

    Drought hits street

    Investor attitude of indifference towards equities continues to build on itself. The BSE Sensex for the week ended lost more than 100 points. With markets not seeing any near term triggers, benchmark indices have been on a decline. Over the past 15 days, the BSE Sensex recorded 12 down days losing 170 points.

    Industrial economy seems to be on an upturn. Growth in Index of Industrial Production has been rising, clocking 6.4% YoY for month of July '02. GDP numbers, on back of similar performance in fourth quarter of FY02, recorded 6% growth in first quarter of FY03. In FY02, economic performance was driven by the agricultural sector while industry was a laggard. In FY03, industry -- probably benefiting from higher agriculture growth last year -- could drive home overall economic performance. The two sectors, contributing to a little more than 50% of GDP, performing alternatively could be viewed as resulting in a diversified economy without dependence on any one sector. Consequently, reducing overall volatility in economic performance. East Asian economies, with high dependence on exports, have been more susceptible to global trade cycles, as compared to India & China.

    Having said that, poor agriculture performance is likely to affect the economy with a lag -- the timing is uncertain. However, lower output has led to higher minimum support prices for farmers. Assuming percentage drop in output is compensated by similar percentage increase in prices, while revenues will decline net take home will rise. Without any agency quantifying the net impact on agriculture sector and the timing and extent of affect on the overall economy, the uncertainty leads to volatility in financial markets.

    As mentioned in our report last week, markets tend to perform poorly in run up to the festival season. And it seems to be playing out this year as well. The lack of investor participation during this period could also be due to the Hindu inauspicious period of 'Shradh', which ends on October 6. With industry performing well, investors could look forward to the earning season to reflect the upturn on corporate performance. At only the start of the third quarter earning season, the U.S markets have fallen to their five-year lows. This does not bode well for U.S markets with rest of the season yet to play out. Consequently, domestic sentiment is not going to receive any support from global equity markets.

    The only near term trigger seems to be second quarter earnings season. That said, on a poll conducted on Equitymaster, 53% believed the result would lift sentiment while 43% said otherwise. Considering the BSE Sensex is trading close to decade lows and market valuations at lower end of the band, the risk to reward ratio for entering equity markets at such times is favourable.



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