Ridham Desai, Executive Director and Head (Equity Research), JM Morgan Stanley Securities SENSEX PROJECTION: 3,600 by year end

Mitesh Mehta has his office on Dalal Street, bang opposite the Bombay Stock Exchange. It's a Friday afternoon, and the Director of broking firm K.G. Vora Securities is absorbed in frenetic activity-of an unusual kind. Unusual for a stockbroker. Unusual, coming just days after Union Budget 2003. One part of the softboard in Mehta's office predictably has a list of shares with the best buy rates alongside-Infosys at around Rs 4,000, Telco at Rs 147 and Pantaloon at Rs 46, amongst others. But it's the other side of the board that's setting Mehta and his broker-colleagues aflame. It's a list of the intra-office betting rates for the ICC Cricket World Cup. India is scheduled to play Kenya later in the day, and all kinds of bets are being placed: There's a wager on Sachin scoring more than Sehwag; and another on India reaching Kenya's total inside of 40 overs. The best buys' list can wait. "Business is down," shrugs Mehta, adding in jest that he might just have to put up the shutters in six months if the current situation persists till then.

Mehta may be half-serious, but he isn't being totally flippant either. Last fortnight, as marketmen took stock of Jaswant Singh's budgetary proposals post February 28, there wasn't much reason to cheer. For the week ended March 7, the BSE Sensex ended each trading day in the red, finishing the week with a 130.60 point fall, and a loss in market capitalisation of some Rs 25,000 crore. At the time of writing, the market was perilously close to the 3,100 levels.

Market sources reveal that a clutch of six to seven brokers who had built up huge positions in the futures and options market pre-budget in the hope of a post-budget rally were trapped courtesy the freefall. And at least one of them was considering surrendering his broking card on the National Stock Exchange (NSE) to bail himself out.

Meantime, the foreign institutional investors (FIIs) who have been net buyers in the Indian markets for some time were in for a rude shock when a SEBI proposal debarring FIIs from participating in trading via Participatory Notes (P-notes) made its rounds. Typically, short-term investors like hedge funds prefer the P-note route, and if this proposal goes through, it could impact FII flows. Although SEBI clarified that the issue was open for debate and no decision would be taken immediately, the proposal appears to have spooked the FIIs, who have turned net sellers in the first few days of March.

THE BIG SCARE: The threat of a US-Iraq war has taken its toll of global markets. Oil prices has soared and FIIs are adopting a wait-and-watch policy

Of course, the main reason for the bearish sentiment on Dalal Street last fortnight was the cloud of uncertainty hovering over global markets courtesy the US President's war designs on Iraq. Along with the prospects of war, fears of a terrorist backlash on the US and North Korea flexing its nuclear muscle also spooked stocks. The fm had done his bit for the market in the budget-he's done away with long-term capital gains tax and dividend tax, and reduced corporate surcharge, for instance-but clearly that wasn't enough to blow away the cloud of apprehension. There was too much bad news all around, with Unit Trust of India's (UTI's) huge redemption pressures only succeeding in making the picture gloomier than ever. "There is an extreme pessimistic sentiment in the market and is mostly due to the external environment," says Abhay Aima, Country Head (Equities & Private Banking Group), HDFC Bank.

Indeed, the threat of a US-Iraq war-which has been in the air since late last year-has taken its toll of global markets. Oil prices have soared, a lot of money has been sunk into gold, foreign inflows into emerging markets have dried up, and investors are adopting a wait-and-watch policy. In the first week of March, FIIs had turned net sellers, and the Sensex at the time of writing was likely to touch the 2,900 bottom that the technical gurus have charted out. There's only one thing now that can stem the rot: A war, finally. Make that a short war, which will at a stroke put an end to the uncertainty that's paralysed markets. "A quick and clean war-of up to 10-15 days-will be good for the market," avers Shailendra Bhandari, Managing Director, Prudential ICICI Asset Management Company. He adds that the chances of the conflict lasting longer than the Gulf war of the early nineties are remote, since that war had gone on for just six weeks. Adds Ridham Desai, Executive Director and Head (Equity Research), JM Morgan Stanley Securities: "The biggest worry of the markets is a situation of no war happening but just uncertainty prevailing."

Shailendra Bhandari, Managing Director, Prudential ICICI AMC SENSEX PROJECTION: 3,800 by year end

On Tenterhooks

Clearly, in the absence of any concrete triggers, marketmen are counting on the war effect to stimulate stock indices. Just as in 1990, when Iraq invaded Kuwait, the Gulf war provided the perfect impetus for a stock rally in most global markets (See War-time Investing). K.G. Vora Securities' Mehta expects the war to push up the Sensex to 3,600, after possibly falling to a pre-war low around the 2,900 mark. "But don't expect more than 3,600," he warns.

Mehta isn't the only one not expecting fireworks on the markets. Anything over 4,000 is the realm of the unknown, and marketmen are comfortable predicting a 15-20 per cent upside for the Sensex for the calendar year from hereon. Jyotivardhan Jaipuria, Senior Vice President, DSP Merrill Lynch, expects the benchmark index to touch 3,750 by the year-end. "It will be a positive market, but no bull run. But look at it this way: It will still be better than the last three years." Desai of Morgan Stanley says, "we're in a low-return environment,'' and expects the Sensex to end the year at 3,600. And Bhandari of Prudential ICICI adds that 3,800 by the year-end "isn't unrealistic".

If no one's talking about 4,500 and 5,000 levels for the Sensex any more, that's because there simply doesn't appear any provocation in the near- to medium-term for the indices to shoot up to those levels. One sure-fire trigger for the markets would have been some definite moves on the disinvestment front, but the Finance Minister didn't spend too many seconds delving on the plans for privatisation of more state-run units. Punters meantime aren't expecting any big-ticket disinvestment (read HPCL) till September. Then, there is that section of the market that feels the fm should have been more forceful on the direct tax reforms front since the fiscal deficit is veering out of control, and the internal debt has peaked at some 65 per cent of the country's gross domestic product.

Yet, attributing the post-Budget sell-off to the proposals the fm didn't announce is ridiculous-although it's a ritual that happens every year. To be sure, nine budgets of the past 10 years have been greeted by a selling spree by punters. According to a study by Morgan Stanley, the average returns a month after the budget in these years works out to negative. For the record, only Manmohan Singh's budget was greeted with aggressive buying, but don't forget the existence of a certain Mr. H. Mehta in the market in those days.

Mitesh Mehta, Director, K.G. Vora Securities SENSEX PROJECTION: 3,600 by year end

The sell-off on the markets has little to do with the Budget and everything to do with the noises of war being made by Bush. In fact, if you think the Indian markets have tanked, take a look around and witness the erosion in stock prices not just in developed markets but also in emerging economies. For instance, in the past five months the Sensex has comfortably outperformed other Asian markets like Korea, Hong Kong, Indonesia and Singapore (See Better By Comparison). Over an eight-month period, the Indian markets have outperformed Asian emerging markets comfortably. In the January-December 2002 period, the NSE's Nifty inched up by 3.3 per cent even as the Nasdaq and the Dow slumped 35 per cent and 17 per cent respectively.

That's probably why Merrill Lynch has decided to increase its India weightage in the Asian region. In fact, most markets including US and Europe are today below their 9/11 lows, India being the only notable exception. What's more, contrary to popular perception, it isn't as if foreign money hasn't been flowing into India. It isn't pouring in, but since last January, FIIs have been net buyers for most months, and they ended 2002 with net buying to the tune of Rs 3,627 crore. Analysts also point out that in the last seven quarters, FII investment in the top 40 stocks has increased by a fourth, from 16 per cent to 20 per cent, with technology, pharmaceuticals and financial services getting most of that money. So, although foreign money has been coming in, it's the lack of any semblance of domestic follow-up that's kept the market in check.

If the stock indices haven't succeeded in getting buoyed by the FII money, one reason for that is the steady selling by mutual funds in equities, the UTI in the main. Marketmen reveal that since January 2000, UTI has been selling on an average $50 million (Rs 240 crore) a month to meet redemption pressures. Their fear is that the bearish scenario could intensify over the next couple of months as five schemes with a total corpus of close to Rs 700 crore will mature.

Coming: "Base Effect"

Whilst the redemption pressure on UTI will help in ensuring there's no bull charge, the slower growth projected for the Indian economy in the year ahead will make it even more difficult for the war rally to be sustained. Economic growth will slow down for two reasons: One is what market strategists term the "base effect," which simply means that growth in sectors that have been booming, like two-wheelers for instance, will come down as the base gets larger. The second reason is that the lag effect of a poor monsoon will be felt from the second quarter of the coming year.

Jyotivardhan Jaipuria, Senior Vice President, DSP Merrill Lynch SENSEX PROJECTION: 3,750 by year end

Still there's plenty of good news that should be enough to result in an upturn from current levels. Corporate earnings for the current year are expected to be stable, in the 20 per cent region. This in turn will result in the contraction of price/earnings multiples, thereby making valuations more attractive. For the current year, the India market's P/E is just above 10, and will come down to 8.2 in the coming year. Analysts point out that it's at a P/E of 9-10 that the market starts rising-not into unrealistic territory but at 15-20 per cent annually. What should also help the markets move upwards is the saturation of returns from bonds, which might just convince investors to shift to equity. "The risk-reward relationship between debt and equity is getting balanced out," reckons Jaipuria of DSP Merrill Lynch.

For any sustainable boom, retail participation has a role to play, and that's why hopes of a full-blown bull run are pretty bleak, what with very little retail money flowing into the markets. Indeed over the years, the small investor's participation has reduced significantly: A decade ago, some 15 per cent of Indian households would invest in equity; that figure has plunged to just 2.7 per cent. But the message in Jaswant Singh's budget speech is clear: Be ready to take risk if you're looking for decent returns.

One warning, though: The days of 40-50 per cent appreciation are over. Twelve to fifteen per cent annually over the next few years should be more like it-which, every scam-struck investor will readily agree, is infinitely better than a 30 per cent spurt one year followed by 40 per cent plunge the next.

additional reporting by Dipayan Baishya

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