A day after the Budget, the euphoria is absent from the headline stock market indices. Maybe it will return after the token cut in the bank rate. Many banking, pharma and cement stocks continue to show strength. Although several demands of the information technology sector have been met by the Budget, the fact of the matter is that tech stocks continue to be correlated to the Nasdaq. In fact, the performance of the US economy is more important for these stocks than the domestic Budget. The impact of the Budget on individual stocks will continue to drive the market for some time, till all the Budget implications are fully digested. Liquidity is the key to the bullish sentiment. FII inflows have been very strong in January and they have continued in February, confirming a shift away from the American markets. The fall in the US markets last year gave the fund managers an excuse for diversification. India, with its relative insulation from world trends, and with one of the fastest growing economies in the world, is an obvious choice. Here too, the difference between the tech and old economy sectors is clear. The tech sector is closely correlated with markets in the US, and is therefore not a diversification. That's the reason why the old economy stocks have received so much attention, in spite of a slowdown in industry. The other factor going for the old economy used to be the rock bottom valuations. Even after a smart run-up in these stocks, valuations continue to look attractive. And the Budget has added to the attraction of the India story.
Lowering of interest rates in the wake of the bank rate cut will make investment in fixed deposits unattractive, and the mutual funds, particularly the debt mutual funds, are expecting to see a shift of funds their way. Additional reasons for forsaking bank deposits include the lower eligibility for TDS and the lower deductions under section 80L. And some of the flows to debt mutual funds are expected to spill over to the equity funds too. Moreover, the reduction in interest rates and the lower incidence of corporate tax will mean more money in the hands of companies, which should at the very least lower their redemptions from mutual funds.
If this surge of liquidity does take place as expected, the bull run in the old economy stocks should continue. To be sure, earnings this year are unlikely to be good, but the market has already discounted that, and is looking ahead to the next fiscal. What could go wrong with this scenario?
The government must deliver on promised reforms. And finally, if there's a hard landing in the US, all bets are off, as foreign funds could retrench wholesale from emerging markets.
This editorial from Business Standard has been edited for space
Copyright © 2001 Indian Express Newspapers (Bombay) Ltd.
