Crystal-gazing

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At the beginning of each year, analysts religiously gaze into their Hubble equivalents to decipher how the markets would look in the future and what would drive them.

As one tries to fit the jigsaw puzzle together, it becomes clear that the same elements that drove our markets in 2006 and gave the bulls some wild jitters in May and December are likely to be at play in the Chinese year of the Pig as well.

While the new year may necessitate a change in your desk calendar, there is no need to think that the rules that governed your investment decisions in 2006 are going to become obsolete overnight or stocks come with expiry dates like the numerous pills we pop.

The determination of large MNCs to get a toehold in the Indian companies at any price, a trend that manifested itself last year, is likely to continue and may be played with a renewed vigour this year as well.

Holcim's fancy price of $260 per tonne paid for Gujarat Ambuja's stake in November was way above the $93 paid by Heidelberg in September for a pie in Mysore cement.

Oracle paid a price of Rs 2,100 per share for upping its stake in I-Flex last month. The valuation of 46 times the expected 2007 earnings makes Infosys look cheap at 32 times the expected earnings and Satyam at 23 times, a downright steal.

IBM could well be the next tiger on the prowl. Having sold its personal computing business to Lenovo, Big Blue is actively looking for a large software company to shore up its delivery capability in the arena. Last week, IBM-Siemens combine bagged an order $9.3 billion from the German military.

Valuations are likely to go up in the telecom space as well. The race is currently on for acquiring Hutchison Telecommunications International's 67 per cent stake in Hutch-Essar, the third largest player in the rapidly growing telecom arena.

Vodafone, which holds 10 per cent stake in Bharti Airtel has bid for the entire Hutch-Essar stake of 100 per cent for a fancy price of $17 billion. With an enterprise value of $17 billion and a subscriber base of 2.23 crore, the EV/Subscriber value of $762 is 18 per cent higher than what Bharti commands.

Acquisition of any Indian steel major could similarly trigger off a re-rating of the stocks in the sector. Then there are the freight corridor and atomic power opportunities that will flourish in 2007.

Though not foreseeable in 2007 itself, global investors may veer around to the view that South Korea is no more an emerging market. Defining South Korea as a developed market could mean that India gets more allocations from the funds that track emerging markets.

What could go wrong?
Weather could be the biggest villain. El-Nino is making it's presence felt this year. If the phenomenon persists beyond March, we could have less than normal precipitation this summer.

The deadly combination of El Nino and global warming is likely to result in 2007 ending with the dubious distinction of being warmest year on record, if UK researchers are to be believed.

While crude looks tamed for the time being, it could warm up again if the hurricane season, which runs from June to November, sees some serious damage to the oil facilities in the Gulf of Mexico.

A sharper than expected US slowdown or higher than expected rate hikes in India could also make things difficult, though they seem to have been factored in. Though not in the realm of possibilities, any effort by the regulators to rein in PN inflows could have a serious setback on the FII inflows.

But the most probable and also the biggest reason for a fall at any point of time in the future could be the expanding open interest in derivatives.

Last week 26 new stocks were added to the derivatives list, taking permissible securities to 153. As more stocks and indices become eligible, the open interest could mount, creating periodic scares in the markets.

A trend to watch out for would be the rising popularity of the Sensex futures on the BSE. Daily volumes are now averaging more than Rs 500 crore. As more of this turnover translates into end of the day open interest, the fad could turn into something permanent.

Irrespective of what happens during the year, the one truth that is not going to change in 2007 or any other year for that matter, is the one who buys low and sell high is always going to make money.

Disclaimer: Financial advisory Anagram may have recommended stocks earlier at lower levels.