Buyback hasn't worked. The government's disinvestment-through-crossholdings formula is being viewed with suspicion by one and all. No one expects Yashwant Sinha to deliver the goodies by, for example, lowering the long-term capital gains tax (a perennial market demand); nobody expects growth to revive anytime soon. In short, there is nothing for the market to look forward to in the budget--not with a government that seems set to fall sometime this year. The general belief is that if Dream Merchant P Chidambaram's budget couldn't do the trick, Rollback Sinha's can't be expected to work wonders either.

The markets are so attuned to bad news that I wouldn't be surprised if theindices do actually rise after February 27--in sharp contrast to earlier years when the markets usually built up a momentum before the budget and then went into decline.

A lot would depend on how people feel about the economy this year. Granted, we have had poor export growth, weak product prices and a real slowdown in several industries. But one underlying reason for the depressed sentiment is consumer pessimism. And this, despite there being a lot of money in the hands of people (thanks to the Fifth Pay Commission's largesse, among other things) and despite banks being willing to expand retail lending like never before. People are unwilling to spend even though everything worth buying is cheaper than before (real estate, cars, consumer durables).

The only explanation I can find is that people are holding back their spending plans because they are uneasy about the future. This uneasiness can only be overcome if some events trigger off a wave of optimism: a new general election which brings the Congress,or a more cohesive group of parties, to power; an all-round economic recovery (both domestic and global); or a stock market recovery. Of the three, the first two are possible events, the last is probable.

Now, hear me out. I am not saying that optimism will definitely return to the stock markets. But after more than three years of stagnation, psychologically, the market is looking for excuses to rebound. Despite a lousy political climate, a terrible fiscal situation, and a confused policy stalemate, the markets have fought back pessimism by oscillating in the Sensex groove of 3000-3400. This, for me, is an indication that the markets have nowhere to go but up this year. Too many things can still go wrong (domestic politic chaos, a deeper global recession, etc), but I am discounting all but the worst case scenarios while making this prediction.

This broad reason apart, there are several micro-factors why the markets should look up. Take the excessive obsession with certain kinds of stocks. In the recentpast investors have placed excessive faith in brand stocks and infotech companies--to the exclusion of the so-called commodity stocks. Traditional blue-chips like Reliance, Hindalco, Larsen & Toubro and strong financial institutions like the State Bank of India and ICICI are all quoting at price-earnings ratios of less than 10 (some of them at pathetically low rates of two or three). Infosys, on the other hand, quotes at a P/E of 75.

According to me, the traditional blue chips should start recovering by mid-year if the global economy shows even small signs of recovery. There are some 18-20 Sensex stocks with a current weight of around 40-45 per cent in the index that are waiting to snap back into action. Once this happens, there will be no stopping the Sensex from crossing the 4,000 mark in the shortest possible time.

Another reason why I think there will be a recovery is the corporate need to repair the debt-equity mismatch. The weak equity markets of the past few years have skewed equity patternsbecause corporates have raised more debt to get their projects through (the Essar group is a case in point). But sooner or later the institutions will force them to raise equity--even at low prices. This means a number of low-priced equity issues could be launched this year--which will bring retail investors back to the markets. With the government doing its bit to make public sector equity cheap (mostly by distress selling), investors have one more reason to return to the primary market for equity.

With all this happening, I wonder why the markets should not do the decent thing--and rise in 1999.