After the slide to 3900 Sensex levels on last Monday, we could assume that the market is close to a bottom. Conventional wisdom suggests buying selectively for the long term. One would however be wary of conventional wisdom in the light of history. I don't think the market will fall much below 3900. But we could well have range-bound trading for quite a while.
There are too many factors that could get worse and not too many that could improve. Sooner or later, the US Federal Reserve's rate hikes will trigger a bear market in America. Lower US stock prices will translate into an economic slowdown, for the American economy is heavily leveraged to the wealth effect.
Then the dark side of four per cent trade deficits and five per cent private sector savings deficits will also have its say. FII inflows to India will slow down, the rupee will slide more sharply than anticipated as well. Most importantly, 62 per cent of Indian IT revenues and 70 per cent of Indian Venture Capital funding come from the States. Both would catch a cold if the Americans took a bath.
But the more serious worries are actually on the domestic front. Fiscal slippage in both State and Central accounts gets worse everyday. The reform process has slowed down again and there is no apparent attempt to cut government expenditure. A second successive poor monsoon and drought will mean a drop in rural consumption and that will retard GDP growth. With the possible exception of a rupee slippage, none of this is good news for the market.
So, why should stock prices head North? Prices shouldn't head sharply South either, since current earnings discounts are cheap even if one assumes flat corporate performance in 2000-01. Big company stock prices should be stable because the last quarterly results suggest that size does matter. Big companies did well, small companies suffered. Another signal suggests that lack of rural demand is already beginning to bite. FMCGs saw a slowdown in topline growth _ which may be attributable to slow offtake in the rural/ semi-urban markets where they have been making
a thrust.
In specific sectorial terms, I can however see a positive revaluation for pharmaceuticals. There was a downgrade when the industry got no concessions with the Budget. The post-Budget tax-breaks and clarifications on the ESOP front have changed the picture. So there must be hidden value
in pharma.
I like the industry even more since the consolidation process that started in 1998 appears to be nearly finished. So the big players and the successful boutiques are now easier to identify. Of course, there are big question marks on the patent front and the effect of further globalisation. But you may note that the industry itself doesn't seem to be cringing. Unlike most Indian sectors, it doesn't appear to fear external competition. The absence of cringing fear about being swamped is a better signal than any tub-thumping gesture of confidence could be.
