The e-bubble

Yashwant Sinha, who on two notable recent occasions acted swiftly to sweeten the mood of unnaturally depressed stock markets, threw up his...

Yashwant Sinha, who on two notable recent occasions acted swiftly to sweeten the mood of unnaturally depressed stock markets, threw up his hands this week and confessed he is perplexed by the behaviour of the share bazaar. He is not alone. Investors are flummoxed too. Having gone relentlessly upward until March against all rational explanation, Indian markets are headed south just when common sense would suggest a positive outlook based on improved corporate performances and other favourable factors.

One of the oddities of the times is business confidence moving upwards while the market moves downwards. Once again, headlines at the start of the week showed the Sensex marching in step with the Nasdaq. With the preponderant influence on the Sensex coming from infotech, telecommunications and media stocks, it was to be expected that when the Nasdaq composite index took a big hit it would knock the wind out of the Sensex as indeed it did. None of the good reports from the old economy companies could alter the trend. The index touched an 11-month low. The Nasdaq, described as the bellwether of high technology stocks in the US, is down 36 per cent from the March highs. That is the extent of disenchantment with high-tech.

The question is how wide and deep is the disenchantment. Is it the case that technology stocks are being regarded by investors in the same way as cyclicals, subject to the same economic laws, affected in similar ways by a rise in inflation and interest rates? Some analysts think this is exactly what is happening. According to a global strategist with Merrill Lynch, investors were persuaded last year that the technology boom was driven by innovation but since March, the markets have started treating technology stocks as highly rated cyclicals.

There is concern about high valuations of tech stocks and there is concern about the slowing of the US economy. If this means that investor belief in the magical power of levitation of technology stocks, defying the laws of gravity, is wearing off, it is a good thing. As the hype, oversell and unreal expectation disappear, the potential of technology companies will be more realistically assessed.

Infotech companies, for example, will find it hard to go on posting losses and yet see their stock prices rise severalfold. That is good and bad news. Good news in that it will be difficult for bogus, copycat companies with no new ideas or sound revenue models to go on taking investors for a ride. Bad news for truly innovative companies. Those breaking new ground can do without the pressure of having to show profits within a short time. But on the whole, the return of realism is very welcome. There8217;s a lot of woolly-headedness about e-commerce.

Sameer Bhatia had to be brutal to be kind when he told this newspaper that most dotcom companies in India are going to fail. ICRA has made an almost identical assessment. The number of Indian PC users will have to increase a hundredfold before e-commerce can take off. E-commerce hopes are failing for other reasons in western economies as the fate of Boo.com, the British e-tailer shows. There is certainly promise out there in high-tech but it is not quite what the world has been led so far to believe.