Politics once again dominated the mood on the stock exchanges today and the scene very closely resembled the one in March this year, where the indices reacted violently to adverse political developments. Though the market response this time around was not so violent, it seemed as if operators prepared themselves over the weekend for an impending fall in the indices.

Kerb market prices had displayed a very clear weakness with major stocks ITC and Reliance in particular falling during weekend deals and again when the market re-opened for trading on Monday.If the position of the market was a reaction only to political developments then there should not be too much more of a fall, as trading during the latter part of the day seemed to indicate. But if the event triggers a withdrawal of funds from the market, ie selling from the FIIs, then there could be a more than substantial fall in stock prices, and that to soon.But the reasons why the FIIs came into the country --relative valuations vis a vis other markets and a stable rupee -- are still valid. Besides, the political instability factor was more of an eventuality than an oddity with the potential to shock the market. Despite this it is clear that the peak of FII buying has passed for the moment atleast.

In addition, besides a few sectors like pharma, motorcycles and fast moving consumer goods, that are doing well the outlook for the rest of the industry whether it is synthetic textiles, cement, steel, automobiles, tyres, petrochemicals and consumer durables are plagued with overcapacity and falling demand, does not inspire confidence. Rising steel prices is more a function of international price movement rather than a demand driven one, which means that steel companies might even have to sacrifice some volumes to realise these higher prices.

The finance minister has further hinted at lower interest rates with a grand design of increasing consumer spending in mind. But even with the current position of domestic interest rates it will be difficult to imagine an immediate spurt in consumer spending. Despite the rise in the value of fixed income assets and consequently individual wealth, people are more likely to feel that given the potential fall in future income both on accumulated assets and current savings, their consumption should reduce further and their savings should increase. So a recovery in the economic cycle is a little further away than the market hopes and so is a sustained recovery in equity prices.LML, the new favourite. While Bajaj Auto reeled under falling sales and accumulating stocks during the first two months of the current year, forcing the company to cut back on production by a severe 20.4 per cent, its arch rival LML Ltd, seems to be doing just the opposite.The current period is a bad patch for the scooter and moped segments of the two-wheeler industry, with consumer preferences shifting towards motorcycles (given an increasing realisation of a scooters ineffectiveness under city conditions and a demographic shift of buyers to young riders). In the first two months of the current year, the trend seen the whole of last year of the shift from sccoters to motorcycles was accentuated. Motorcycle sales were up by an average of 25 per cent while that of scooters down by 14 per cent.

Unless one considers the performance of LML.The company has bucked the trend in the scooter segment once more (for 1996-97 its sales increased by 15 per cent against an industry increase of just 7 per cent). It managed to increase both its production and sales for the first two months of the current year by 20.5 per cent and 26 per cent respectively, being the only one to do so amongst major scooter manufacturers and doing better than the averages displayed even by the motorcycle segement (22 per cent increase in sales for the first two months of the current year).The remarkable performance of the company has been amplified in the stock market in the recent past. The stock has appreciated from a low of Rs 35 in mid-May to Rs 71 in mid July, while in the same period Bajaj Auto moved from Rs 850 to Rs 890.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.