Global slowdown impacts Indian tech stocks

By Oommen A. Ninan

MUMBAI, MARCH 18. Even though the political turmoil continues, stocks are at attractive valuations. However, market observers feel it is better to stay away from technology stocks as the global markets are negatively assessing these stocks. It is not possible to insulate Indian technology stocks from the global markets.

``The political situation is likely to stabilise this week with the resignation of Mr. George Fernandes and none of the political parties is ready for a mid term election. The market is likely to open slightly higher on Monday as fears of the Government having to resign recede. However, markets are likely to be cautious in tune with the global markets before the U.S. Federal Reserve meeting on Tuesday. It is better to stay away from technology stocks at present even though they are extremely attractive from the valuation point considering the continuing profit warnings in the U.S. and the weakness on the Nasdaq,'' said Mr. Sunil Shah, a leading broker on the Bombay Stock Exchange.

The BSE 30-share sensitive index (Sensex) dipped by 136.22 points at 3745.74 compared to 3881.96 in the previous weekend. On the National Stock Exchange (NSE) the S&P CNX Nifty Index lost 63.25 points at 1191.15 compared to 1254.40 points. The Sensex continued to slide amidst high volatility throughout last week. The carry forward rate has moved down to 7.34 per cent from 14.91 per cent. Zee Telefilms (22.8 per cent) was a major gainer while major losers were Telco (10 per cent), Tisco (9.4 per cent), Bajaj Auto (9.6 per cent), State Bank of India (9 per cent) and Reliance Petroleum (8.8 per cent).

Old economy stocks lost heavily after faring well after the Budget presentation. Many players shifted their portfolios to include the infotech stocks, most of which have come down by 90 per cent from the highs and were quoting at 52 week lows. The markets were rocked last week by the Tehelka.com expose which led to fears of instability at the Centre. The aggressive stand taken by foreign institutional investors (FIIs) however stalled the free fall. FIIs bought equity worth Rs. 975 crores during the past five days. However, the mutual funds sold equity worth Rs. 64 crores in the same period.

The markets across the globe have been mauled by the tech slowdown. The continued profit warnings by the U.S. as well as European information technology and telecom majors have led to a meltdown. Last Friday the Nasdaq breached the 1900 level for the first time since November 19, 1998 following the latest profit warnings by Oracle and Compaq. The Dow is well below the 10000 mark after a long time at 9823. The Nikkei stumbled to 11433, the lowest since December 1984 on fears of a global economic slowdown. Said Mr. Shah, ``The big worry for the markets currently is the lack of earnings visibility, that means, the ability of the company to forecast even short term results.''

The U.S. Federal Reserve will be meeting on March 20 to consider further rate cuts with fears of the U.S. economy going into a recession increasing. The Fed is likely to cut the rates by another 50 basis points thus bringing the rate at 5 per cent. This will be the third in a row this year after the cuts by 50 basis points each on January 3 and 31.

With the consumer confidence index showing a slight uptick from 90.6 level in February to 91.8 in March, experts are ruling out the possibility of a rate cut higher than 50 basis points.

In the rout that has been on, several old economy stocks too have fallen sharply as selling took place to compensate for the losses suffered in the technology, media and telecom (TMT) stocks. Several stocks have become attractive in terms of their dividend yields as also on expected buybacks or acquisitions. ``At the lower valuations it is becoming increasingly attractive for managements to increase their stakes in the companies, especially for the multinationals,'' said Mr. Imran Contractor, Research Head, Milan Mahendra Securities. In the last few days, two multinationals, Hoganas and Cabot have announced open offers to buy out the Indian shareholding in their Indian subsidiary. Over the last few months foreign owners of Phillips, Punjab Anand Lamps, Superior Air Products and some others made offers to buy out India shareholders. The offers made at substantial premium to the domestic price gives good opportunity to small investors to exit the stock. The higher offer price also gives an opportunity to investors wanting to earn decent fixed yields on their investments.

The Finance Minister has outlined several steps to streamline the stock markets including increasing the stocks to be traded in the rolling settlement mode. All the A group stocks as well as the stocks comprising BSE-200 will be compulsorily traded in the rolling settlement with effect from July. This measure is akin to the earlier decision in 1994 when badla was banned.

The Securities and Exchange Board of India (SEBI) also made an announcement in this regard. This will definitely reduce the large scale speculation and volatility on the bourses where many operators were buying and selling scrips without any real investment.

Send this article to Friends by E-Mail

Section  : Business
Next     : Will duty cut halt smuggling in gold?