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Paul Noronha

A person walks past the statue of bull outside the BSE. (file photo)—

Slowdown is rearing its head with all its ugly stickiness on the equities horizon. The market has been trying to price in negatives to form a long-term outlook for 2009 and 2010. The third quarter results would tell how efficiently Dalal Street has factored in earning blues. Through January, a valuation readjustment process may dominate the trading proceedings depending on further clues.

Fundamentally, a sharp rise in the cost of capital and decline in domestic and export demand have cast shadows on the corporate earning prospects for the next three to eight quarters.

If one believes that the monetary and fiscal policy measures will help in reducing problems, one cannot ignore their limitations. Monetary measures alone cannot fill the gap created by a reversal in capital inflows and weaker exports. Considering that current public debt is already high — close to 77 per cent of GDP — there is limited scope for an aggressive fiscal policy response.

Some expect that after having inflation growth rate contained by more than half from its recent peak and a general election looming, the Government may throw caution to the wind.

Given that recovery in external fund flow would depend on recovery in global economy, domestic scenario is likely to shape things in the medium term.

From a comparative macro and historical points of view, Indian equities appear cheap. Global risk aversion has also waned significantly. But these may not translate into an increase in FII inflow. The economic uncertainty is likely to keep downside risk alive.

There is almost a consensus that Indian equities would take a long while to return to the premium that they fetched during the bull run. The values have to be re-established based on changing fundamentals. Investment strategies would perhaps focus more on a bottom-up approach as against a top-down one.

The first half of 2009 may see dramatic re-rating of majority of stocks and sectors. It may throw up new defence bets. The second half is likely to be a period of relative consolidation. A material recovery may come about in 2010.

Optimists and pessimists differ on the timings, but all tend to agree that the ensuing upheaval is likely to have a lasting impact on the behaviour of the corporates and the regulators. India Inc has to abide by the tested metrics of value creation in a trying time.

In the short term, another stimulus package by way of fiscal and monetary concession is good for keeping optimism alive. But the war rhetoric, trading holiday and a lack of consensus on if the worst is over would keep the key indices range-bound or downbeat this week.

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

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