ROOM FOR DISAPPOINTMENT

IT IS JUST THE HOPE OF MORE GOVERNMENT MEASURES AND IMPROVEMENT IN CORPORATE PERFORMANCE THAT IS KEEPING MARKETS BUOYANT.

Markets do not have to be logical and rational every day. Throughout history, markets have generally been more irrational than rational. This has happened several times before. For example, in late-1999 to 2000, when the whole industrial economy was hurting, the Sensex made a high of 6,200 in the first quarter of 2000. This happened because technology stocks were driving the market while other companies, including those in auto and cement, were in trouble.

More recently, there has been a lot of activity from the government’s side in terms of tax cuts and relief measures, which creates news flow. Markets had been anticipating the tax breaks, which is an example of hope trade. We have to see what more the government has to offer.

The third factor in the market rise is the change in capacities. There has been a large scale destruction of businesses across a number of industries. What we are seeing is not a normal recession wherein companies go through cycles — there is good cycle, a bad cycle and then it turns around, and you come back. This time, because of the debt problem, there are companies that may never come back or return to their original strength.

So, structurally, a lot of capacity in various sectors such as media, airlines, roads, manufacturing, or MSMEs, will never be viable again because of the body blow to their growth in the last couple of years. When something like this happens, then the existing players benefit. So the market is rewarding a handful of companies that have survived this and are, therefore, in a position to benefit from reduction in the overall capacity in India by virtue of being the survivors. For example, in 2008, a lot of Wall Street firms went bust or had to merge with others. A lot of capacity went out and the remaining companies rallied because when capacity went out, business had to be done through somebody and those were the handful of firms left.

This phenomenon can be quite powerful and it means that only a handful of companies can drive the market. Look at telecom. So much capacity has gone out. Obviously, subscribers have not gone out and just one or two players will take the spoils. These factors, in my view, are driving the markets, and Nifty in particular.

Overall, the market is right now in the hope trade mode. If hope materialises, then you might see the mood sustain, but if the slowdown continues the way it has been, then there is plenty of room for disappointment by the markets. The next round of GDP numbers and earnings of corporate India will be critical in deciding this. At present, the market believes that the government is going to take a number of measures as it has done in the past and this hope is keeping Nifty’s mood buoyant.

(As told to Rashmi Pratap)