Market trends -- No cause for cheer

S. Vaidya Nathan

THE stock market may yet have some more downside risk left.

While this could happen in the next month or so, any major and sustained improvement appears unlikely. It is now fairly certain that the market may be hard-pressed to even close 2000 at last year's levels.

This would require a 20 per cent move from the present levels and more, if some incremental downside is because of around 10 per cent comes about. To a large extent, the big downside is because of profit-booking by FIIs in June and July on a scale (net outflows of close to $ 535 million) unseen so far in their eight years of operations in India.

Liquidity factor: The stress on the liquidity factor -- winding down of carry-forward positions and bank lending against dematerialised shares -- also appears to have played a role in this context. Just as the liquidity factor was partly behind the uptrend in the technology sector stocks between September 1999 and February 2000, it appears to have played an equal role in the downtrend.

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Further concerns with regard to the levels, per se, of badla positions on the BSE and the Automated Lending and Borrowing Mechanisms on the NSE, may not be warranted. Such levels have been there in the past for similar levels of the market. There is, however, a caveat.

It is quite possible that a substantial part of the carry-forward and ALBM positions may be of `loss' nature. Particularly in stocks where there is high level of concentration in terms of exposure levels -- Global Tele-Systems, Himachal Futuristic, Zee Telefilms, Silverline, Satyam Computers, Digital Equipment, Wipro and Infosys. So there could be some downside as margin calls are made and positions are covered up to some extent in these stocks. Any decline in this universe of stocks could lead to some downside risk for the broad market by way of even defaults.

FII linkage: Much of the carry-forward and ALBM positions in Infosys may well be on account of warehousing in anticipation of FII purchases. But in the two-and-a-half months, this has not happened. The FIIs have been on a selling mode and this may have compounded ``operator-driven activity'' on the downside and impacted carry-forward positions. This factor and (needless to add) any further FII selling may contribute to the downside risk.

The impact of the FII selling also shows that the firm trend in the first quarter of the year may have been maintained only on account of their $1.4-billion inflow in the first four months. The impact of a $515-million pull-out has been stark and shows the lack of depth in the market. With domestic funds also short on inflows, the depth provided by them has also gone.

A lot would, therefore, hinge on how the FIIs view the overall market now. It is likely that barring a significant expansion in the universe of quality listed stocks (this could take time), the FII flows may continue to, in the best case scenario, be in the $1.2-1.5-billion region.

As far as the year 2000 goes, it is difficult to see these levels exceeded. Any incremental inflows may also wait out the current turmoil involving the rupee-dollar parity. As in the last two years, the FIIs may well come in with cash in the last two months when they are ``expected to be facing year end dividend and redemption'' pressures to avoid front running costs.

Economy, a mixed bag: There perhaps has never been a time in the 1990s when different parameters of macro-economic data have thrown up so many divergent signals. Tax collections are up even if one considers the possibility of one-time bunched payments, in respect of dividend tax; exports are up; the `reported' fiscal deficit is down, and corporate earnings, (excluding the technology sector) pass muster.

But at the sectoral level, the signals are not so encouraging. The automobile production numbers (commercial vehicles); the trends in the oil sector; the drop in railway freight revenues; the low growth in cement volumes; the absence of pricing power in many sectors, suggest that unless things turn around quickly, the economically-sensitive sectors may be in for a tough time in the next few months.

It is also likely that the full impact of the Budget imposts may be felt in the next nine months and get reflected in the performance for the full year 2000-2001. The fact that the monsoons may be better than expected is good augury, but the final word has to wait for better information.

Pointers in prospect: What does all this add up to for the market outlook? Not too inspiring. But there are a few pointers:

Interest rates have clearly bottomed out for the next 12-18 moths (the rupee gyrations notwithstanding). Upside, if any, may be limited to around 1-1.50 percentage points. Some of it is already priced in.

The IT sector would continue to show good earnings growth of 40-100 per cent.

The next bout of FII inflows will largely go into the technology sector stocks (mainly IT). But a higher degree of selectivity and a move to quality is now possible, since the sector as a whole has been marked down sharply.

The fancy for media stocks may be a thing of the past. Previous valuations may not be relevant in this sector as more options become available, selectivity will be possible.

For the Old Economy, indications on sustainability of decent growth rates may be required for any significant upside.

Domestic `equity-oriented' and sectoral mutual funds may not see the kind of inflows they did last year.

The market may continue to wobble in the 3,800-4,800 range, depending largely on the direction and magnitude of FII flows.

But for long-term investors (who can look at a two-three-year period), some attractive valuations are available and more may emerge. The portfolio of Infosys, Hughes Software, HCL Technologies, Wipro, Gujarat Ambuja Cements, ITC Bhadrachalam Paperboards, Cummins India, Birla 3M, CG Igarashi Motors, SmithKline Healthcare (a possible big takeover story), Cummins India and Tata Honeywell could hold long-term potential. Hindustan Lever could be the anchor to provide stability. It may be an opportune time for long-term investing and, use any further declines to build a quality portfolio for a two-three-year period.