• OCTOBER 5, 2001

Frayed nerves

The recent 'hijacking' drama on the alliance air flight is an indication of how frayed nerves are here in India. The nervousness would be similar if not more in the US that has recently had to bear the brunt of misguided fundamentalism.

In such a situation the average man on the street is looking for the safety of his life, family and money. This could be the reason why the retail investors are keeping away from the stock markets. The immediate concern is safety and not returns.

The frayed nerves are not without genuine reason. The way wars are fought has changed and that perhaps is the most dangerous element in the whole episode. Armies fought wars, not so long ago, and civilians were less involved (usually). However, now economic centres are targets and not political ones. We have seen this happening so many times over the past decade. Terrorist targeted Mumbai for a series of bomb blasts. The world trade centre was attacked once in 1993 and then again in September 2001. The fear is that of the enemy lurking with friends and striking at any time without warning.

The situation is just like a time bomb. The Americans want revenge. Many sections in the Middle East, Africa and Afghanistan feel that they have a holy war to fight and this is just the beginning. Thus, the world is once again getting aligned but this time it's the fundamentalists against the civilized world. At least part two is for sure, which will be the US retaliating. And now with the crash of the Russian Airliner that had mostly Israelis on board, two very powerful countries that were watching from the side will be drawn in.

Thus, the tense environment is hurting consumer confidence. This in turn has affected businesses especially in the US where 66% of the GDP comes consumer spend. It will be quite some time before these nerves are calmed. Only then consumers and corporates will spend more and travel. However, people will eventually get back to their old ways. Thus, till this occurs the stock markets in the US will only reflect the nervousness.

At home while majority of the sectors are unscathed due to a low contribution of exports to GDP. However the major indices, which have give a large weightage to the software sector, are depressed due to the sector's exposure to the US. The events have only meant that the recovery of the sector expected to be in mid 2002 has been delayed. The markets will be waiting for the outlook for the remaining two quarters for companies like Infosys. The news that markets will be looking for is whether these companies can meet their earnings guidance or not. It's unlikely that these companies will revise the estimates upwards and even if they can stick to their estimates bourses will be where they are.

Also with the slowdown in the Indian economy it is unlikely that the numbers from corporates will be encouraging. Thus, in such a situation it's left to the government to bring a turn around in sentiment. While at one end the government has stepped up infrastructure spending it now needs to get its divestment act together.

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