The massive unloading of stocks by foreign institutional investors (FIIs) following the Union budget announcements has resulted in the indices crashing during the past fortnight. Milind Karmarkar, head of research, Dalal & Broacha Stock Broking, spoke to Denny Thomas on the impact of budget announcements on the stock markets as well as the impact of economic sanctions on India: Excerpts from the interview:
What is the reason for the turmoil in the markets?
The current turmoil is mainly because of the perception that the Asian region as whole has become extremely risky for portfolio investment. Foreign institutional investors (FIIs) were expecting the Union budget to announce measures to restore confidence. However, this year's budget should be seen in the backdrop of the previous year's dream budget. Given the circumstances, the finance minister Yashwant Sinha couldn't have given a better show.
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There is a fear that budget has not addressed the issue of economic sanctions and only a passing reference has been made. However, the budget has addressed the macro-level issues. The central plan outlay has been raised by 30 per cent this year which is expected to result in a GDP growth of 7 per cent. In fact, this, in the long run, will have a positive impact on the economy which will also benefit the stock market. We believe that the Sensex will continue to slide due to heavy selling by the FIIs.
This implies that you are resigned to a bearish trend. Where do you think the market will settle in the near future?
The factors do not look favourable for investment at the moment, which is driving the FIIs away. Many of the Asia-dedicated funds are facing redemptions which are resulting in major outflows. The confidence of FIIs has taken a beating and they have no choice but to unload stocks. As I mentioned earlier, there is a crisis of confidence in the region as a whole and India cannot remain isolated. The Sensex is expected to settle in the region of 2900-3000 where it will float listlessly.
What could revive investor confidence under the current circumstances?
The economy has to turnaround which alone can improve things. There has to substantial industrial growth.
Post-budget, which are the sectors that look attractive?
The pharmaceuticals sector should do exceedingly well in the days to come. This is because India has the potential and is among the largest markets. Moreover, once India signs the WTO pact in 2005, many more patented products will reach the country. For that matter, any sector which focuses on mass consumption will be a market outperformer.
How do you rate the software sector?
I believe that many of stocks in this sector are overpriced specially the scrips of companies whose business is centred on the Millennium Bug or the Y2K problem. Therefore, only the top five companies in this sector should be looked at. But even these companies seem overpriced at the current levels.
Which area is emerging as attractive investment option?
Speciality chemicals is one are which is emerging as an attractive option. Worldwide this segment has been re-rated by the investors and in India, too, it is getting a better rating.
The stocks in this sector include ICI and Clariant, among others. After being demerged from pharmaceutical companies, these firms have become extremely focussed. Therefore, they perform better.
What is you view on the cement and steel sectors?
We are not bullish on these two mainly because of the factor of excess capacity. Unless this is absorbed the bottomlines of the companies in these sectors are not likely to be any good.