Marketmen adopt wait and watch policy

By Oommen A. Ninan

MUMBAI, DEC. 24. The stock market indices may weaken further as many participants are keeping away from bourses. Almost all foreign institutional investors and domestic funds preferred to adopt a wait and watch policy till the beginning of the New Year. Economic slowdown is a major cause of worry for market participants.

``The markets are likely to remain range-bound over the next week with subdued activity on account of most FIIs being on their annual vacation,'' said Mr. Sunil Shah, Director, Evergreen Broking, a leading broking firm on the Bombay Stock Exchange. ``Further the huge outstanding position in information technology stocks remains a cause of worry,'' he added. Indicating a strong bearish sentiment on bourses Mr. Shankar Sharma, Director, First Global, another leading broking firm, said, ``this week it is the turn of the old economy stocks to fall.''

``This week the market is likely to be weak and the target seems to be 3500 (Sensex) with little support at 3750 to 3800 and 3625. There is no strength in terms of advance decline and also there is high net long outstanding position which is a matter of concern,'' said Mr. Jignesh Shah, Strategist, ASK-Raymond James Investment Management. Moreover the market may witness less activity as it will remain open for a lesser number of days.

The BSE 30-share sensitive index (Sensex) fell by 5.6 per cent last week. It dipped by 231.26 points to 3905.90 from 4137.16 in the previous week. On the National Stock Exchange, the S&P CNX Nifty index dropped by 72.60 points to 1240 last Friday from 1312.60 recorded on the previous Friday. Leading the fall were the technology, media and telecommunication stocks such as Infosys, Satyam, NIIT, Zee Telefilms and MTNL and some old economy stocks such as Bajaj Auto. The major gainers were Hindustan Lever, Hindustan Petroleum and Nestle. Till Thursday, FIIs were net sellers to the tune of Rs. 525 crores and the domestic mutual funds were net sellers for Rs. 278 crores.

The carry forward (badla) rates, determined on Saturday, have gone up to 14 to 15 per cent compared to the earlier week's 12 per cent. Despite a sharp fall of around 231 points the outstanding positions have increased to Rs. 2,812 crores at the end of last week from Rs. 2,670 crores in the previous week.

Last week, the outstanding position has gone up to Rs. 3,206 crores indicating a build up of speculative positions especially in the information technology counters resulting in a sharp fall in share prices.

Further, the slowdown in the U.S. economy is likely to affect the software sector. According to Mr. Sunil Shah, there are two views as to how the U.S. economic slowdown is likely to affect this sector.

One is that Indian software firms, being cost competitive, will be able to get a substantial market share as a slowdown will force the clients to switch to firms offering low cost solutions.

The other view is that a slowdown will result in the U.S. firms to renegotiate the billing rates to lower levels. This along with lower spending in information technology will result in a slowdown in growth rates of IT companies.

However, there is unlikely to be any indication of this slowdown in the forthcoming quarterly results. The impact of the U.S. economic slowdown is likely to be clear only after the results are declared in March.

``So it is better to stay away from any further investments in IT stocks until the clouds of darkness surrounding the IT sector are cleared,'' said Mr. Sunil Shah, adding, ``the 176 point rally on the Nasdaq last Friday will provide some relief to the IT stocks.''

The old economy stocks are expected to be comparatively safer in the coming days. High oil prices was one of the main reasons which had led to the fall of the old economy stocks a few months back.

Oil prices are now back to around $23-25 a barrel from the highs of $35 this year. However an economic slowdown in India still continues with automobile as well as cement sales not picking up even in November.

The Government is planning to kickstart the economy through projects like the Golden Quadrilateral which have been announced. But the action is missing. To get the desired results, these announcements will have to be followed with some drastic actions. Mr. Sunil Shah said the actions of the Government so far indicate that it is serious about disinvestment this time around. Most of the public sector enterprises stocks such as MTNL, VSNL, the refineries are languishing at extremely low PE multiples and at a substantial discount to their book values.

Confirming the slowdown in the economy, diesel consumption showed a dip of 8.2 per cent during October as compared to the same period last year, stated a report of Fitch Ratings India.

In fact, diesel consumption slumped during six out of the first seven months of the current fiscal. Furnace oil has also reported negative sales of 5.6 per cent in October and 4 per cent during April-October.

``The oil companies are therefore forced to export almost every month,'' the report stated. High speed diesel sales have also declined showing a negative growth of 8.4 per cent. The increase in international petroleum prices primarily has restricted the growth in domestic demand. The overall sales have fallen by 1.6 per cent during April-October this fiscal over the same period last year. This is quite in contrast to the expectation of a high demand with the approaching winter season and demand coming from the agricultural sector.

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