Slowing economy induces caution in bourses

By Oommen A Ninan

MUMBAI, DEC. 3. The stock markets are looking up again after a long time. However, analysts feel that the impending slowdown in the economy will hit the bottomlines of many companies and the third quarter results would show this trend.

``The market seems to have nibbled at breaking the strong resistance at 4053. I expect the market to go down to 3600 to 3700 before the end of December. Nasdaq continue to be weak and volatile therefore technology scrips will find it difficult to appreciate significantly from these levels and old economy core performance is not good therefore there is more reason to expect the market to go down rather than go up,'' said Mr. Ashwini Agarwal, Executive Director, Kotak Securities.

``Technology, media and telecommunications (TMT) stocks are expected to open firm on Monday, after the firm trend on Nasdaq on Friday. We retain our cautious outlook on the markets as the economic slowdown probably is accelerating and affecting sentiment,'' said Mr. Imran Contractor, Research Head of Milan Mahendra Securities.

The Bombay Stock Exchange (BSE) 30-share sensitive index (Sensex) closed above 4000 last week after hovering around 3500 to 4000 for nearly two months. Last time it recorded above 4000 was on October 6 when the Sensex closed at 4092.42. The Sensex closed at 4031.96 for the week, gaining 163.62 points compared to the previous week's close of 3868.34. On the National Stock Exchange (NSE), the S&P CNX Nifty Index moved up by 48.20 at 1274.90 last Friday against 1226.70 recorded at the close of the previous week.

``Listless stock markets bounced back on soaring volumes and volatility,'' said Mr. Contractor. With international markets remaining under pressure for most of the week, stock prices in the domestic bourses, in the absence of a cue, remained volatile, but closed higher. Indices gain have been driven by old economy and fast moving consumer goods (FMCG) stocks which have come back into favour from beaten down valuations on expectations of corporate announcements of buy-backs, creeping acquisitions and take-overs.

``The mood of the market has changed from gloomy to introspective to cheerful over the past two weeks. The rally which was started by value buying in old economy stocks has spread to new economy stocks,'' said Mr. Sunil Shah, a leading broker on BSE. The markets saw an excellent bounce back on last day of trading with the technology stocks, he added. All the information technology counters witnessed good buying support and some shares like SSI flared up. Balaji Telefilms and Mukta Arts have also been witnessing continuous buying over the last week.

The Department of Company Affairs' probe into the current increase in cement prices dampened sentiment on the cement counters. Mr. Contractor said that Cement stocks firmed up sharply during the week but were off their highs as concerns of sustenance of cartel and a Government inquiry being initiated under the Restrictive Trade Practices Laws.

However, Grasim Industries moved up sharply on fund buying. This stock price rose nearly 19 per cent during last month from Rs. 220 and Grasim is up more than 50 per cent from its October low of Rs. 170. Net purchase outstanding in Grasim have moved up sharply to 11.86 lakh shares from 3.28 lakh shares at the end of last week.

``Cement scrips witnessed very large volumes with heavy volatility as bouts of optimism and pessimism led to sharp movements in stock prices,'' Mr. Contractor added. Rumours of a bid being made on ACC led to its stock price remaining firmer than any other stock in the sector. Gujarat Ambuja was the weakest in the sector.

In line with other old economy stocks, Tata Steel has been on the uptrend on expectations of better performance and significant improvements in operating efficiencies. Mr. Contractor feels that the new-found optimism in steel appears to be premature as the pressure on steel prices internationally has already led to a downward pressure on the domestic prices. The landed cost of steel is cheaper by about Rs. 2000 a tonne. Said Mr. Contractor, ``We believe the fall in the demand domestically due to the sharp slow down in automobiles and construction.'' Construction sector was hit due to drought in several states.

Among the old economy stocks, ITC moved up on news that the Company increased the prices of its cigarettes by 10 to 20 per cent. TVS Suzuki has been moving up on buying from domestic mutual funds. FMCG counters have also been firm. Hindustan Lever has been a major gainer with sustained buying by foreign institutional investors (FIIs). With depressed market conditions, Godrej Soaps has deferred divestment of its stake in Godrej Sara Lee.

Bajaj Auto has reported November sale of 1.07 lakh vehicles as compared to 1.14 lakh vehicles in the last year. The company has reported highest sale of more than 45,000 motor cycles in November. ``Ironically,'' said Mr. Contractor, ``profitable sales of its scooters continue to fall with lesser remunerative sale of its motorcycle soaring.'' The company's intention to acquire Maruti is perceived negatively by the markets. The market rumour is that one of the largest FIIs having substantial holding in the company has been reported to have pressed sales in the counter.

SKF Bearings decided to reduce production level in its Pune plant in view of the significant reduction in demand for the company's products as a result of a general downturn in automotive related segments. The company also announced that this curtailment of production will adversely affect the result of the current quarter. This is pointing to the economic slowdown which may further affect the economy related companies and may reflect in the third quarter balance sheets.

Trade figures announced for October indicate a fall in the current trade deficit as compared to last year. Robust export growth is an encouraging sign. However, negative growth in non- oil imports confirms that the slowdown in the economy might continue for some time.

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