The Hindu Business Line : Dalal Street to see subdued trading ahead of Budget

The “irrational exuberance” of the third quarter of 2007-08 lost its steam early in January and the market is yet to recover fully from the wounds of the crash.

Easy money-driven rally is not on for Dalal Street now.

Apart from the consolation of remaining “technically” in a bull market, the equity street is still far from reflecting optimism.

Bulls have tenaciously kept the Sensex bound within a range for the past three weeks, but did not have the heart to step into another adventure, lest it might again turn sour.

This week, the last before the Budget, Dalal Street may remain sedate and let the chances of revaluations largely go by.

No appetite

It is clear that the long-term investors have also lost appetite for aggressive factoring of forward earnings.

The Wall Street players, who are used to irrational exuberance, fostered by the US monetary and fiscal authorities, have not returned to Dalal Street yet.

Many of them are still “bullish” about the ‘India story’.

Strategically, it could have been ideal time to re-enter Indian equities at a much lower valuations than say in December.

But since the valuations in the developed markets, particularly the US, are ruling cheaper in terms of relative price-earnings ratio, global money has no compulsion to flow to the emerging markets.

Miscalculation

In short-to-medium-term perspective, local bulls had miscalculated on the overseas money flow and its supposed role in sustaining the rally.

After all emerging markets are not market economies, where key assumptions guiding the investments may go awry because of unexpected policy interventions. So the risk-weighted returns are likely to remain relatively lower even though absolute returns are higher.

It is usual when overall risk-taking goes at a higher-than- normal premium in the global capital market.

Local bulls, which were building a dream in the beginning of the year that the overseas money flow would continue to keep the buoyancy intact on the Dalal Street – except for a few minor hiccups, have apparently been caught on the wrong foot.

Investment decision

The bitter reminder, perhaps, is that the economic fundamentals, such as, deficits, export earnings, purchasing power, currency valuations and the GDP growth may not always influence investment decisions in the global market place in the expected way. The corporate earnings or market returns are also relative elements in the investment decision making process.

So a dream about a “dream” Budget may not lure even the staunchest supporter of the “India story”. In the capital market, nothing is permanent except for the investors’ interest. It would not be surprising if, even after a “good Budget”, the equity market develops a negative bias.

(Responses may be sent to jayanta_mallick@thehindu.co.in)

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