US Federal Reserve chairman Alan Greenspan recently shocked the financial
world and became the butt of much ridicule when he took the podium at a seminar
of senior economists. Addressing the packed hall, Greenspan admitted that he had
no clue why stock markets had moved the way they had in recent times. Even
before the cackle in the hall had died down, he threw in the clincher–that he
had no forecasts for the future, since he hadn’t a clue which way markets
would move. The cackle died abruptly, as if cut by a knife, when everyone
realized he was dead-serious.
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Forget the anecdote. Greenspan’s statement was strong–and a brave one–coming
as it did from the man who oversees functioning of what is the most mature and
rock-solid financial market in the world. Remember, ’tis the stock markets in
the United States–and therefore the ready access to funds–that have seen
that country attain the superpower status that it enjoys today.
And clearly, that’s the order of the day, today. Look at the Indian stock
market–across the great seas and on the other side of the war zone. All
indices have been experiencing a ride akin to that in the United States, though
the fundamentals and economic situation are diametrically different. When
technology companies began announcing their financial results last week–and
their performance wasn’t all that bad, mind you–the market lost its grip on
reality, cocked a snook at fundamentals, thumbed its nose at future guidance,
and crashed... And what a crash–stocks of the strongest Indian IT companies
slipped to 52-week lows, with ten companies witnessing an erosion in market
price by 10% or more! Mastek and Infosys Technologies were the worst hit, losing
38% and 17% of their market value, respectively.
Ask anyone at the stock exchanges the reason for this sudden loss of faith in
IT scrips. There common refrain was–"Duh! Don’t know... Wanted to get
out before ’twas too late."
Too late? Too late for what... for better sense to prevail? That,
inexplicably, has always been the reason for market rout. Unless punters got
together and laid the ground for some cool profit-taking...
The bloodbath, and its fallout
The slide began soon after Infosys announced its results–minutes later,
the Sensex was down 50.43 points. As for the Nifty, it lost 18.95 points with
similar haste. To find out what had caused the fire, Dataquest dialled in five
top IT CEOs. "There’s nothing to worry about–this is because of the war
in Iraq," said the first. "Infosys’ results are the reason"–the
second. "High performance expectations got belied and that caused the
crash"–the third. "The geo-political situation is not too good in
the Asian region"–the fourth. The fifth blamed his own company, which had
"underperformed".
All ascribed different reasons for the crash... But all believed the market
would bounce back soon.
The Sensex will rebound, and lost ground will be won back. However, that
rally will last only till the next shock wave... and that will be the norm till
those that man the markets learn to disregard sentiment and look instead at
fundamentals. And things will turn only when the market watchdog ensures that
punters don’t play mindgames with people at large. Of course, it would help if
the watchdog were given some teeth–and the courage–to bite when it has to...
Rajeev Narayan
The author is executive editor of Dataquest