• SEPTEMBER 16, 2000

Why stock markets may not go anywhere?

Earlier this financial year, the stock market rally came to an abrupt halt with the bursting of the software bubble. What followed was a period involving taxing foreign investors registered in Mauritius, drought in some states and finally rising inflation and volatility in the forex markets. Added to this was the sharp rise in crude prices.

Further to this were other factors weighing down on the market. These included the failure of the government to push through with disinvestment of holdings in public sector undertakings (PSUs). Also, the increasing uncertainty and volatility involving flows of foreign money took their toll on the market.

To counter that, we had a fundamental improvement in the economy. Or as the Reserve Bank put it in its Annual Report - a resilient economy. Exports accelerated sharply during the current fiscal year, touching a peak growth of 30% in April and May. The government, very surprisingly, seemed to be getting a grip over the fiscal deficit. Added to that we had a brief period of declining interest rates.

Read more on the Indian Economy

Now however even the fundamental positives seem to be losing their sharpness. The burgeoning deficit in the oil pool account is nearing the Rs 100 bn mark and threats to increase uncontrollably. This is likely to exert pressure on central government finances as the government tries to absorb a part of the deficit in view of elections in key states early next year. Exports growth has slowed down and so has the growth in industrial production. The key reasons for this have been the drought and the subsequent floods in key markets. Also, worries have surfaced regarding the trade deficit, which could have implications for the forex markets.

Letís step back and look at what actually spurred economic activity last year. It was higher demand for consumer goods and a fast growth in production of intermediaries. Investment demand, so necessary for sustainable economic growth, was absent. Even at present, investment demand (especially in the manufacturing sector) continues to remain abysmally low. This is also indicated by the sluggishness in non-oil imports.

So presently we have a stock market that is short of positive news flows. The nearest thing to look forward too will be the corporate results for the quarter ended 30th September. In all likelihood, software companies will continue on their trail-blazing path. However, old economy stocks could witness some pressures on margins as costs rise. This is not to say that software companies will be left untouched by this. Infact, higher inflation would result in investors demanding higher returns from stocks, which would call for a correction in stock prices across the board. And letís not forget, the last time crude prices jumped to these levels, a large part of the global economy fell into recession (albeit short lived). Finally, the markets could be hit by the central bankís attempts to cool down pressures on the price front.

Presently, the scenario for the markets does look pretty gloomy. What we need is positive news flows and this could come in the form of PSU disinvestment and fresh second generation reforms. These news flows have the potential to let the markets push all the not-so-good news aside and continue to push higher. But should one expect the government to finally take tough decisions. Well there is no harm in expecting the unexpected from the government. After all in the recent past, the government has always done what the market never expected them to doÖ.nothing!

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