Economy stocks gaining momentum on bourses

By Oommen A. Ninan

MUMBAI, APRIL 2.Speculative interest on information technology scrips diminished drastically and operators are looking for newer pastures like economy related stocks. Scrip movements in the coming weeks will be based on the annual performance of companies. Some corporates have started announcing their annual results.

``With selling pressure in Hindustan Lever and Infosys counters, the Sensex is ought to move southwards as these two scrips have nearly 40 per cent of the total weight in the BSE Sensex,'' said Mr. S. Ramakrishnan, Vice-President, Retail Broking, Motilal Oswal Securities. ``However,'' said Mr. Ramakrishnan, ``the immediate support being 4867, the Sensex has support at 4700 levels and in the worst scenario at 4528.''

According to Mr. Jignesh Shah of Triumph Securities, ``4850 is the intermediary support level and penetrating this level can make market worse. Unless the Sensex breaks through 5240 level the market cannot become bullish.'' Mr. Shah opined that economy stocks are gaining momentum whereas infotech stocks look weak. The short term effect on banking stocks would be positive considering Bank Rate cut and CRR cut.

The advance tax payments and investments for tax shield led to low ebb liquidity and retail and corporate treasuries toned down their activities during last fortnight. Again many technology stocks have come off nearly 40 per cent from peak levels. But the non-tech stocks had a far intensive beating. ``Thus after April 4, the last day of settlement on the National Stock Exchange, the market should stabilise,'' said Mr. Ramakrishnan, adding, ``with quarterly numbers set to flow-in from the first fortnight of April, many scrips would look cheap and trigger investment buying.''

The falling NASDAQ rather shadowed the much expected positive impact of the U.S. President Mr. Bill Clinton's visit. The only consolation was the year ended with a 37 per cent jump in the Bombay Stock Exchange 30-share sensitive index (Sensex) to 5141 in March-end this year from 3740 on March 31, 1999.

During last week software and media stocks melted mirroring the sentiment in NASDAQ. Infosys fell further to $193 or by $30 on March 31 trade at NASDAQ. In Mumbai, Infosys lost Rs. 1,770 eroding the gain of Rs. 1,740 registered in the previous week. However, Mastek (another software stock) closed at the upper circuit last Friday. In rolling segment stocks such as Aftek Infosys and Sri Adhikari Brothers also bugged the trend and closed higher.

Last week saw a shift in activity to pharmaceuticals and cyclicals. Reliance with around 10 per cent weight in Sensex leaped 30 per cent to Rs. 314 on March 31 from Rs. 240 on March 24 thus averting a major crash.

The BSE-30 share sensitive index resumed the week at 5203.16, moved erratically in a wide range of 5286.81 and 4867.23, before closing at 5001.28 against last weekend close of 5141.42, recording a sharp fall of 140.14 points or 2.73 per cent. The BSE-100 index moved down by 35.11 points to 2902.20.

Old economy stocks such as Larsen & Toubro, Grasim, HPCL, Madras Cements and HDFC met with institutional buying. The combined daily volumes on BSE and NSE shrinked by around 25 per cent on an average to Rs. 7,500 crores from Rs. 10,000 crores indicating losing speculative interest.

The markets are caught up in software frenzy and even traditional heavyweights are suffering for a long time. A commentary published by the State Bank of India on ``America's economic boom'' states that with globalisation a reality, India has to be prepared to respond to any downturn in the U.S. economy. This is because the current expansion (in the U.S. as well as in India) unlike in the past, has been mainly driven by the technology sector - software, semiconductors, telecom and the internet. These are called, `increasing returns to scale industries'' (involving high initial costs in programming, developing web sites, or laying fibre optic cables). But once the initial investment is in place, the costs of serving additional customers are relatively low.

The performance of such companies is remarkable in growing economies, but once there is a downturn, fixed costs, maintenance costs and falling revenues make them vulnerable to a sharp drop in profits and jobs than traditional industries.

With information technology already absorbing almost 50 per cent of the total expenditure on capital equipment, it will be increasingly difficult to maintain the current high rates of growth.

A sustained slowdown in the rates of technology spending would immediately force a sharp downward valuation in the price of technology stocks. Some economists fear that once the current growth rate slows down, which is inevitable at some point, there could be a downturn in economy leading to recession and a downtrend in stock markets.

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