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Stick to quality - Views on News from Equitymaster
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  • Dec 22, 2001

    Stick to quality

    December 2001 has seen quite a change of fortunes in the first three weeks. In the first week the Sensex rocketed 4.5%. Since then it has been quite a decline. Over the next two weeks the Sensex has lost nearly 6% since. Are there serious thoughts not of a V-shaped but W-shaped recovery?

    A look at Wall Street moves may throw some light. During December first week the NASDAQ too rocketed by 4.7%. But in the subsequent weeks, the now called 'tech laden, earnings challenged' index has fallen by 3.7%. So, may be the operators were just following the NASDAQ. The Dow in contrast has been steady. It went up 2% in first week of December, lost 2.4% in the second and is up 2.3%.

    Going by the above data, one may feel that the Sensex is imitating the tech dominated NASDAQ to the tee. And this is not unlikely. Since November, tech stocks have recovered quite sharply and Indian TMT bandwagon has simply followed suit. But now with concerns being voiced both in the US and India that the stock recovery may have been a little too quick may have diffused the tech run. US continues to see a spate of earnings warnings. The unemployment levels are near their highs and even an 11th Fed rate cut has not brought the consumers out in the market.

    At the start of December, the global markets had much to celebrate. The US had succeeded in giving an alternative government to Afghanistan and this had raised hopes of easing tensions in the Asia Pacific region. But the Israel & Palestine flare up paid put to such hopes. Attack on the Indian parliament fueled the already heated spat between India and Pakistan. India has already recalled its high commissioner from Pakistan signaling, maybe, an end to diplomatic ties.

    Another thing that has changed since the start of December is the oil prices. Since their lows of US$ 16.5/ barrel per barrel, oil is slowly inched up to US$ 19.5/ barrel. For a country like India, whose fiscal deficit target of 2002 is already out of hand, this sure is not happy news. The Argentine collapse and any domino impact on world financial markets is a cause of concern. J.P MorganChase, which already has an exposure to Enron, like many U.S financial institutions, has sizeable exposure to the Latin American country. This could keep financial markets jittery, considering the not yet forgotten financial meltdown commencing in Russia.

    For investors, both Indian and global, who have seen their portfolio being routed in 2000 and 2001, these developments do not instill confidence. It is likely to take some real growth numbers to get investor confidence up. Having said that, the Indian economy is quite different than that of the US. While US is struggling with consumer spending and a recession, India is a growing economy, though growth rates are lower.

    Going forward, it is likely that the Indian stock market aping of the west is likely to weaken and more local factors like border tensions, oil prices, divestment and a burgeoning fiscal deficit will take centre stage. Stick to quality.



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