In the shadow of Nasdaq

By Oommen A. Ninan

MUMBAI, APRIL 16. The stock markets are at crossroads and investors are confused over the steep fall in share prices especially technology stocks in the U.S. markets - Nasdaq and Dow Jones. The Nasdaq is controlling the Indian information technology stocks while the ``old economy'' stocks are being totally ignored. Investors generally move by the frenzy, not reality. Only a few realise that this is an excellent time to enter the economy related stocks.

``Nasdaq will keep the Indian markets low'', said Mr. Jignesh Shah analyst of Triumph Securities. ``Since Dow Jones is also showing a downtrend the stocks across the board are expected to be low at least for one or two days'' Mr. Shah added.

Disilussionment with technology stocks are gripping the sentiment of the market due to the downgrading of the valuations for the new economy stocks worldwide. The high volatility witnessed recently in the information technology (IT) stocks on the bourses globally has driven away both investors and market players from the stocks, reducing their appetite for an exposure to this sector.

``The markets are expected to move downwards this week as the Nasdaq has gone down by 355 points on Friday,'' said Mr. Rakesh Mehta, Managing Director of Renaissance Securities. According to him it is the level to buy but not aggressively. Mr. Mehta believes that old economy stocks are attractive at these levels. One should plan and enter these stocks considering a period of 8- 9 months.

The Nasdaq Composite Index and Dow Jones Industrial Average recorded the biggest losses of 355.51 points or 9.67 per cent and 617.78 points or 5.68 per cent respectively on Friday last. Many other developed markets - London, Japan and Hong Kong too saw sharp declines on heavy selling in the U.S. markets. The Indian ADRs too have been hit by the wave. Infosys Technologies (Infy) lost 18 per cent or $ 37.95 to close at $ 172.86 and Satyam Infoway (Sify) lost more than 22 points or $ 8.5 to close at $ 29.5. Over the week, Infy lost 28 per cent or $ 69.5 and Sify declined by 45 per cent or $ 23.75. On the New York Stock Exchange (NYSE), the ADR of ICICI lost 88 cents to end the session at $ 19.25.

The fall of 750 points in four trading sessions in Nasdaq has hit hard in the face and hope has, at least over the weekend, given way to gloom. Markets had hardly recovered from the shock of the week before. The 500 points recovery has not only proved to be shortlived but also more devastating as far as the sentiment is concerned. Nasdaq, long weekend holidays and hardly any support for even those shares which are at reasonable buy levels, heavy drop in market capitalisation and abruptness of it all indicate a warning for small and medium size traders. It is the big boys who make or mar the market.

The diabolical role played by the eight per cent circuit breaker can hardly be over-emphasised. The authorities must seriously sit up and alter this much abused system which has only helped manipulation. A simple example: if an investor wishes to buy a share in the downward circuit he would be hesitant, but he would do well to wait for a further fall and when the stock is in the upper circuit one cannot buy at all. In both cases the investor is left out. A free counter after a cooling period of say half an hour as in other developed markets would discourage any kind of adventurism on the part of the operator. The eight per cent spread gets so fast exhausted that it is not possible to really measure any real buying-selling strength. If it were open, the counter would reflect the genuineness of buying at higher and higher levels and selling at lower and lower levels. The best part is that it gives an opportunity to the trader to exit and enter as he desires. The previous week witnessed crores worth of orders left unexecuted on ``Black Tuesday''. Especially in the case of an investor who needs money for some other purposes, and is unable to sell his shares for the whole five days settlement due to downward circuit, it is a travesty of justice.

Reliance Industries buyback programme disappointed many especially speculators. Announcing the buy-back price Mr. Anil Ambani, Managing Director of RIL said that the objective of share buyback is to ``manage stock price volatility, lower beta, attract long term investors and provide floor price.'' But the Board has proposed ``a maximum price of Rs. 303 per share for the equity share buyback proposal.'' Now the market is not considering Rs. 303 as ``floor price'' but as ``ceiling price''. However, for long term investors, Rs. 303 is a good price considering the last bonus issue. The rule which disallow any further issue of capital for two years is also partially compensates the long term investor.

The diverting of funds from other sectors which are currently unattractive, if not weak, pushed the economy-related stocks down. Now the reflow of capital to industries such as hotels, pharmaceuticals, consumer and semi-durables and other core sectors may be witnessed considering their attractive prices. In fact, it would come as no surprise if investors were to buy at slightly higher levels - this only to confirm that there is an uptrend in these sectors. For those who feel they may be left out at these lower prices it would be wise to wait for the results which are now due. This has two advantages - firstly if the results are good, investor will have the opportunity to buy and if not, the investor can as well wait or enter with reduced commitment.

The industrial houses - Tatas and Birlas - are going in for a major restructuring. In a recent interview with a journal of Andersen Consulting, Mr. Ratan Tata, said that ``New demands are being made on the group companies in a variety of areas. For the first time, they are being confronted by a new set of performance criteria. The Tatas are rising to the occasion but we have a long way to go. There is awareness both within individual companies and in the group that we need to force the change. It would be pompous of me to say that there is a new paradigm. Changes are always slow and painful. And this has been happening at a time of great economic difficulty. I think that in the long term we will see a considerable change in the way Tata companies look at their operations.''

The stage is now set and old economy stocks look ready to come back into the limelight.

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