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S. Vaidya Nathan

THE last two years have been harsh for Indian investors with the tech stock prices on the decline. But one can notice a firm trend in frontline stocks in FMCG and some economically-sensitive sectors.

And this trend may continue in 2002 as well with diversification being the dominant theme for fund managers.

But it is difficult to see where the big push for a rally will come from. What may stop the slide and provide some upward momentum — say, gains of 15-20 per cent — could be the signs of a recovering economy.

That most downside factors appear priced in may also work towards such a denouement. But the upside too could be limited because, most economically-sensitive stocks appear to be at the top end of their valuation levels since 1995-96. Then these stocks suffered a major downsizing of price earnings multiples.

The fundamentals factor: There are no signs of the slowdown coming to an end, at home and abroad. The only solace is that things may not get much worse in the course of 2002.

The global economic trends are vital for most economically-sensitive stocks.

In virtually every commodity sector, signs are of global price trends weakening, influencing crude, non-ferrous metals, steel, paper and petrochemicals.

While weak crude prices are bound to be good for the economy, the general trend may affect the profitability of Indian companies across the board.

A turnaround in commodity prices without a spurt in demand does not seem likely now as there is over-capacity in most sectors. In the domestic context, the situation is much the same as producers have limited pricing power.

The only sector where there are signs of a pick-up in volumes is cement. Here too the kind of high prices that prevailed for much of 2000 and early 2001 may not be sustained. Much of the push to profitability seems to have come from cost control. But the scope may be limited as the companies have been on a squeeze.

What would be needed to spark a rally in these stocks is at least one of the following: Signs of a revival in demand without too much downside on prices or a willingness of investors to accord higher price earnings multiples to economically-sensitive stocks.

The former may be more desirable. Profit-booking may emerge if there is any spurt in prices in excess of 15-20 per cent as many funds diversified into these stocks in the last 18 months, and may use profit-booking opportunities now and then.

Encore in tech: The tech sector continues to be in a state of flux. At the global level, there are no firm indications of a turn around. The expected outsourcing to Indian companies has also not happened.

But Wipro, Infosys and to a lesser extent, Satyam, have managed to add to their clientele base. There is also some downtrading in the nature of jobs undertaken that could provide volumes, but cut into the profitability levels.

If things improve in the US in the second half, as widely expected, a more concrete picture of growth prospects for tech companies may be available. But the growth rates of the 50-60 per cent kind may not happen over the next two-three years.

This has been priced in largely and unless companies come with numbers more adverse than indicated, frontline tech stocks may not dip as they did in 2000 and 2001. The Nasdaq factor and liquidity may continue to provide short periods of uptrend but may be capped by profit booking.

Looking beyond 2002: There may be an upward move if investors look beyond the next three-four quarters and use current price levels to buy for a two-three year horizon. (But even such investors would have to adopt an active profit-booking approach than a `buy-and-hold' strategy.)

That and some signs of the economy improving, may help the market close 2002 in plus. This is despite the fact that FII flows are unlikely to be anywhere near the 2001 levels of $2.84 billion. Domestic institutional investors may also not have much to invest in equity by way of fresh funds due to the disinterest of retail investors.

The US-64 factor may cast a shadow, as there are clear signs of the corpus of scheme winding down in May 2003. But the better institutional depth in the market may limit the downside effect now.

As for fixed income options, it is comforting that there may not much more downside to interest rates (perhaps, another 0.50 per cent cut is likely).

But the bad news is that for small savings schemes, tax incentives may go and interest rates may get linked to inflation. Even if one of these happens, it may severely constrict investment options for investors. Overall, one more difficult year looms ahead for investors.

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