|Ridham Desai, Executive Director
and Head (Equity Research), JM Morgan Stanley Securities
3,600 by year end
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 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
3,800 by year end
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,"
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
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
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.