Business Standard

Time for patient play

MARKET INSIGHT

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Devangshu Datta New Delhi

There can seldom have been a more confused and uninformed public debate than the current one about the Indo-US nuclear deal. Nobody really has a clue how good or bad the outcome would be.

The politicians and economists don't follow the science; the scientists and engineers are not focussed on macro-economic and strategic considerations. Everybody who has voiced an opinion on the subject has other agendas to pursue as well.

 

However, it is clear that the Congress party is prepared to push on this. Since this could mean the end of the UPA government, one must assume that Mrs Gandhi is already in general election mode, a few months earlier than scheduled.

Although this would be just a minor advance of the election schedule, it could plunge the market into panic. There is no guessing the shape of the next government. It would be a coalition but it may not be stable. It's not impossible that Mayawati could be PM in some cobbled-together third front. Her street credentials are better than Gujral and Gowda, who both managed that feat.

India has had coalition governments for 20-odd years. The stability of those coalitions has been critical to macro-economic growth. There have been three stable coalitions - led in chronological order by Narasimha Rao (1991-96), Atal Bihari Vajpayee (1999-2004) and Manmohan Singh (2004-?).

Each delivered a few years of high growth. Each stable coalition had some policy achievements; each had failures as well. More than anything else, these three coalitions contributed continuity. The continuity allowed business cycles to play out.

There have also been multitudes of fractured coalitions. One disastrous set between 1987-1991 almost drove the nation into bankruptcy. Another set between 1996-1998 resulted in a total loss of momentum on the economic front.

If the NDA puts together a stable coalition, the market will be happy. Ditto the UPA. But the instant this government goes into caretaker mode, fears of instability will become top-of-the-mind.

That fear of instability is already having its say. At least some of the high daily volatility and falling prices we've seen in the past fortnight have been prompted by the political situation. If the government does fall, expect a period of massive price swings and exaggerated bearishness.

The nuclear crisis may abate if either Sonia Gandhi or Prakash Karat blinks in their eyeball-to-eyeball confrontation. But as the natural term of the UPA government draws to a close, similar crises will pop up more often.

Eventually, one will end in a general election. The bearishness and price-volatility will last until the next government is installed. If the next coalition is seen as unstable, the bearishness will continue.

We are into the fifth month of a bear market and it would be prudent to expect months more of similar or worse bearishness. Quite apart from instability, food and energy inflation and the policy responses is capable of hobbling growth.

These are the sort of market conditions where two sets of players thrive. One is the long-term investor seeking value and prepared to average down. The other is the hard-core trader who doesn't mind being short in derivatives and riding sharp short-term rallies. Medium-term investors or traders biased in favour of long positions will get killed. The IPO market looks to be in a coma.

The long-term investors will be looking for the market to ease down to Nifty PEs in the range of 12-13. That means either a wait while EPS catches up or further falls in market prices. The implication is that really serious buying will only come if prices dip another 5-10 per cent or if the market stays in the current price band for another 6-8 months.

The traders will be focussed purely on the 20 most liquid counters or on special opportunities that may arise in M&A transactions, etc. They will need plenty of spare margin and will need to deliberately under-leverage. In this market a "minus" or short could change to a "double-plus" (closing the short and opening a long position) and back again to "double-minus" (net short again) within the same session.

There is certainly money to be made in such a market. But it is not easy money and the risk factors are big and obvious. It is likely to be money that only accrues to the patient player with very deep pockets.

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First Published: Jun 29 2008 | 12:00 AM IST

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