Markets 2001 -- A flat year in store

S. Vaidya Nathan

THE BIG question, now that the year 2000 has closed out with losses of around 20-25 per cent, would be the state of the markets in 2001.

Sluggish trends in the economy; the possibility of a downward bias to commodity prices at the global level; the likelihood of FII flows remaining at around the $1.5 billion-mark in a best case scenario and most probably ending 2001 at lower levels; domestic mutual funds stepping without the kind of cash they had at the turn of 2000; the cagey attitude of investors towards the technology/media/telecom sectors after the experience of 2000.

All these could make for a difficult year for the markets. It is hard to see any significant across-the-board gains. Of course, it is usually said that when many people have a pessimistic view of things, that could be the starting point of a bull run. The psychological aspect is certainly there and has some validity.

But before any sharp uptrend takes place, things could get a little more difficult. Selective stock-picking may deliver the goods, unlike in 1999 and 2000 when selectivity was shown the door in two different directions. A market similar to 1997-1998, minus the wholesale fancy for some sectors (then it was IT, fast-moving consumer goods and pharmaceuticals) may be the likely call for 2001, with stocks rather than the sectors being the lynch-pin strategy.

Also expect fund managers to be a bit more diversified in their investment strategy as the experience of 2000 may deter a wholesale fancy for any one sector. At the same time, it is important to keep in view that it is the IT industry that is well placed to show 50-60 per cent revenue and earnings growth at the aggregate level.

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But it is not going to be across-the-board (the evidence to that effect is already clear in the three quarters of earnings reported in 2000) and so selectivity may be the only strategy that pays at the end of the year. Through the year, one or two sharp liquidity-driven rallies are in the offing around the time the FIIs loosen their purse strings for the year. However, major across-the-board gains would not sustainable unless there is clear evidence of the economy returning to a more sustainable growth path.

Coming off flat year: Unlike 2000 which was coming on the back of a terrific run in 1999, 2001 starts off on a more sombre note. Technology and media stocks, which entered 2000 in the midst of a major bull run, have lost their sparkle in a big way. Most stocks have shed anywhere between 60-80 per cent from their peaks of last February.

Towards the end of the year, the Old Economy stocks regained some momentum, driven perhaps by the diversification needs of fund managers. After the April-July 1999 bull run, it was the first time that the economically-sensitive stocks managed to regain some of the gains that were lost towards the end of 1999 and subsequently. So basically, these stocks start off 2001 in a slightly worse off position compared to 2000.

The liquidity factor: In the last few years, the bullish periods in the market have always been around the time sizeable FII funds have come in. In 2000 too, the bunching up of $1.50 billion between February and April sparked a bull run, though by end-February the story started to unravel. Subsequently, once the prop of FII flows was done with and the Nasdaq started to come off its highs, prices headed south in a relentless manner.

The key question would be the level of FII flows in 2001. After a bruising year across various markets and the decline in the US (the Nasdaq down 27 per cent and the Dow down 5.8 per cent in 2000), fund managers may be cautions about emerging markets. There are also the steep losses sustained in Indian markets through secondary market investments, private placements and in ADRs/ADSs, and so the story is not good.

With the economy showing sings of weakness and the government no signs of getting a hang of the fiscal situation and disinvestment, the levels of FII flows may only in the best case scenario match up to the 2000 levels. A more probable denouement is for net flows to be lower at the end of 2001 compared to 2000.

But even an inflow of around $1 billion can create sharp spurts which may not be sustainable. Domestic mutual funds are unlikely to have any significant fresh accretion to equity funds. This coupled with lower FII flows may mean the liquidity driven uptrend may be more muted than in 2000. With the India Millennium Deposits of $5.25 billion and decline in oil prices likely to see the rupee stable, FIIs may come in the first half. The perception factor: After the fears imposed by the meltdown in technology/telecom/media stocks in 2000 in India and abroad, institutional investors may for some months go in for a diversified portfolio. This is despite the fact that the Indian IT sector is set to post growth rates of 50-60 per cent comfortably. Much of this may be priced in already.

In the economically-sensitive sectors too, the diversification-led rally in late 2000 has ensured that these stocks are accorded better price earnings multiples on a forward basis. This is a risk, since unlike 1999, the year ahead is likely to be a bumpy one for these stocks. If at some point, smart money decides that the higher valuation levels are not justified and/or performance does not improve to lower the valuation levels, these stocks could have a downward bias.

What is in store: A combination of sustained industrial recovery, sharp rise in global commodity prices, improvement in the fresh investments that could lift the engineering sector, continued high interest in IT stocks, FII inflows of around $2 billion and no hiccups of the Pokhran/Kargil kind may be required for even a 20 per cent gain in the broad indices.

These factors may not fall in place together and this could mean a flat year ahead with ups and downs in between. Restructuring-driven gains continuing in sectors such as cement, pharmaceuticals, paper and banking is a distinct possibility.

Stocks and funds such as Infosys, HCL Technologies, Hughes Software, HDFC Bank, BPCL, Reliance Petroleum ITC, ITC Bhadracahalam, ACC, Gujarat Ambuja, Kothari Pioneer Infotech Fund, Kothari Pioneer Bluechip, Alliance New Millennium Fund and Alliance Basic Industries Fund may be some of the better options for the tough year ahead.