Pessimist's points

BEATING THE STREET

The conventional wisdom is that the market is consolidating after a strong bull-run. Corporate results have met optimistic expectations and so has overall growth.

The FIIs are buying again, now that the bogey of Participatory Note ban has been removed. So are Indian investors, albeit in more selective fashion than earlier.

According to this view, the market will soon start climbing again. We will see a phase of caution until the next government is installed.

The moment Mr Vajpayee is asked to form the next government the market will shoot up again. Hence all the trader has to do is put together a warchest in anticipation of that surge.

One can paint a far gloomier picture however. First, consider the political angle. Surveys and pre-poll opinion polls have got things wrong time and time again.

It is possible that the NDA won't come to power again or that it will come to power with a diluted mandate where it is forced to take loonies onboard. Or, it will have a majority but the Swadeshi Jagran Manch will get control. The market will then tank.

Another nasty possibility comes to mind. The NDA comes back with much the same composition as in the 13th Lok Sobha.

But there are harsh decisions that it has postponed in order to not affect the pre-election feelgood factor. Those unpopular decisions are taken immediately. The Budget thus disappoints a market waiting for more sops. Once again, we see prices tanking.

There is a third possibility which could lead to the market tanking. Expectations in terms of both corporate results and overall economic growth are now pretty high.

The market cannot be pushed up further by more rate cuts since real interests rates have bottomed. So growth has to come from meeting expectations or exceeding them.

In overall terms, a dip below 7.5 per cent GDP growth or a drop below projections of average earnings growth of 25 per cent will be an unpleasant surprise.

Unlike last fiscal, that growth will have to come on a pretty high base. A poor monsoon would make those expectations difficult to fulfil. Once again, the market might tank.

In none of the above are we considering the possibility of a major terrorist strike or an Iraqi-style conflict.

Those are also clearly risks that would affect the market adversely if they happened. So would a slowdown in global trade or a hardening of attitudes against BPO in the USA and UK.

It's difficult to take a position on either side of this debate. One can argue equally rationally from either side of the fence and a manic-depressive could support either side according to the mood of the moment. The optimists can muster many scenarios where none of the above negative events occur.

There is only one argument that places me marginally on the side of the optimists. That's almost completely statistical. Usually Indian business cycles have seen three-year swing patterns.

Usually Indian bull markets have lasted between 12-18 months, which have broadly coincided with the growth phase of the cycle. This bull market has lasted barely 9 months so far.