Early Sensex revival is not on the cards

When FIIs invested over Rs 300 crore and gave signals of a strong entry, local punters were enthused. They also followed FIIs displaying their typical herd mentality and built up positions in A group shares. The cut in diesel prices and ordinance on patents were catalysts for the bull hug. However, the developments in Brazil took the wind out of the sails of FIIs.

Once bitten twice shy, FIIs immediately slowed down their investments in emerging markets like India, fearing another round of market collapse and recession. “If they had invested Rs 300 crore in the first two days, they pulled out an equal amount in the next few days,” said a broker.

Even when the market showed signs of bullish phases, the rally remained on the surface. Predictably, over 50 per cent of the volume in the A group of the Bombay Stock Exchange is still accounted by five scrips (Satyam Computers, ITC, Pentafour, Reliance and SBI). These five scrips — now the favourite counters of speculators — registered a volume ofover Rs 1,000 crore (out of the total volume of Rs 2,048 crore) on January 8. However, hundreds of dud stocks in the B2 group are still languishing below the par value of Rs 10 with hardly any trading.

What is the outlook for the markets in the new year? “Barring political uncertainty, and assuming stable external environment, 1999 may turn out to be a good year for Indian stock market. On the way up, the market should find resistance around 3,200, 3,500, 3,700, 4,000 and 4,200 Sensex levels,” said a study by SBI Capital Markets. “The start was good and bad. Problems are there… the market will have to stabilise. The future will depend on the budget and several bills pending in Parliament,” said another fund manager.

The political factor continues to play a major role in the stock market drama. The Vajpayee government’s decision to put off Cabinet expansion has not gone down well with the market players. Expecting pulls and pressures from different constituents of the ruling regime, marketmen arebracing up for more skirmishes on this front. The longevity of the BJP government as well as the progress of many reforms are also being hotly debated by the market community.

Foreign institutional investors have not given indication of a higher allocation for the Indian markets this year. “The Brazil development shows things can go bad again. On the other hand, markets like Korea and Thailand have made strong recoveries in the last nine months. These markets may attract more funds in the current year,” said an official of ABN Amro. The last six months were not good for the markets as FIIs pulled out nearly $ 700 million from India. Moreover, the government has also given indications of further roll-back of reforms. There is widespread expectation that the zero-duty import regime will be ended in the forthcoming budget.

Important bills like Patents Act, Insurance Bill and Companies Act are yet to be passed by Parliament. Stock exchanges are unable to start derivatives trading as the government hadfailed in making the required amendment in the regulations in the last session. There is widespread disappointment about the disinvestment process of the government. It was widely felt that only the government will benefit — at the cost of companies and investors — in the proposed share swap in oil companies. As analysts point out, the government will be able to cover the fiscal deficit with this money but the companies and investors will be short-changed by the latest government proposal.

Amidst this uncertainty, only two segments are showing strong growth rates — pharma and software companies. Software companies have reported near 100 per cent jump in net profits in the last quarter while pharma scrips have vaulted by 50-100 per cent in the few months following the government’s determined moves to meet the WTO deadline on patents. On the other hand, fears are mounting about the corporate performance in the current year. With steel, cement, textiles and petrochemicals continuing in the doldrums, notmany are expecting good results from corporate giants for the year ended March 1999.

The 500-point movement in the Sensex in the first two weeks of this year has already caused concern. Is it an indication of the things on the anvil? SEBI chairman D. R. Mehta ranks India among the least volatile of markets in the world and claims that about five exchanges collected margins worth Rs 700 crore during the period. But investors who lost money in the price rigging and US-64 fiasco are not sure.

Investors, FIIs and corporate captains are all banking on the Yashwant Sinha’s second budget for inspiration. Punters are expecting a pre-budget rally this year as well. They want the government to come out with measures to bring back small investors to the stock and primary markets. Buyback of shares, announced by the government with much fanfare, has not taken off at all. Expectations about various proposals are likely to trigger short-term rallies, only to be followed similar declines. The question is: how long willthis trend continue?