Oct 8, 2001|
Where to from here?
25 days after September 11, and the US has retaliated leaving the markets all the more in confusion. In a situation full of anxiety, panic reactions would not be rare. While there have been bouts of value buying, buying has always followed by immediate profit booking.
The trend in the futures market has been no different. Sensex futures are consistently trading at a discount, which also indicates lack of direction. Again the difference in cost of carry between the far-end contract and the shorter term is too narrow to be considered. As shown in the chart below there is marginal difference in cost of carry between November end and December contracts.
The uncertainty and pessimism in the equity market have clearly reflected in the performance of bond markets. Bonds have consistently outperformed equities over the last one-year primarily due to drying of fresh funds in equities on one hand and strong expectation of a rate cut on the other. GOI securities have strengthened across all yield curves. The RBI is meeting on Oct'26 and there is a strong feeling that the RBI would announce a rate cut along with the monetary policy.
Apart from the outcome and consequences of war, will the September quarter results slated to be announced starting next week, provide some sense of direction to the markets? Not really. What the markets are waiting for is visibility of earnings beyond 2002, especially for technology companies. Markets would be closely watching the earnings guidance coming from these companies. Taking a hint from the US markets, this earnings season is not going to be exciting. Starting from Compaq, all the top tech companies have indicated a grim future. Compaq, Nortel, Sun Microsystems, Corning and Gateway warned of a quarterly loss.
Amidst the uncertainty there is couple of positive developments on the domestic front. The rupee has remained more or less stable; crude oil prices have remained on the favorable side till now (which was a cause of major concern). More important than anything else, there has been a modest beginning on the divestment front. Though the divestment target of the government is unlikely to be met, the government's commitment to divestment could propel interest in PSU stocks.
Though it would be too early to call a trend, FII's have demonstrated a smart comeback in last one week. FII's have pumped in more than Rs 2 bn in last one week as against Rs 5 bn selling in September. This could be due to increase in FII limit and attractive valuations.
The Sensex is trading at historically low valuations (less than 10x FY02E earnings). Though going purely on fundamentals, markets seem to have bottomed out, the movement in the immediate term would be driven purely on sentiments and global events, which are uncertain and outcome of which is not conducive to clear definitions. Incase of markets bottoming out further, investors could use the opportunity to invest in sprouts and bouts.
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