September 11 & The Aftermath

An unforgettable day - but for all the wrong reasons. For all those who were praying for signs of economic revival, it was akin to a doomsday call. Investors, who had been hoping for a gradual reversal in demand for information technology, were left flabbergasted. The terror attacks on US soil threw by the wayside all growth estimates, even the most conervative ones.

The immediate impact on the stock markets, was in many ways, predictable. The Nasdaq fell sharply to 1423 on 21 September, 2001 - the lowest level for the year. While the Sensex fell to an eight-year low of 2,600. The events led the NASSCOM to revise its growth target for the software industry to 30 from 40 to 45 per cent earlier.

But, the fall seemed to have been an over-reaction, as seen from the subsequent jump in both the Nasdaq and the Sensex from then on. The Nasdaq hit a high of 2065.69 in December and is currently 38 per cent over the 21 September figure. Thus, things may not be as bad as market reaction made it out to be.

Even domestically, the Sensex rebounded 20 per cent and is currently at 3100-levels. Post September 11, a spate of analyst downgrades on IT stocks as the attacks put a question mark on the short-term visibility of their business.

Some analysts had wrote off the sector entirely, with no hope of revival. On the whole, earnings estimates of domestic companies were cut by as much as 20 per cent for FY02. The events also affected perceptions of an early recovery in the US economy.

There was a drastic reduction in buy calls on IT stocks. What's more, some marketmen seem to have foreseen a rebound in prices, but preferred to remain cautious keeping the long-term outlook in view. A positive factor in the market was the expectation of a speedy end to the Afghanistan conflict, which seems to have materialised to some extent.

What lies ahead?

For one, growth in software has been on back of volumes rather than pricing. And Nasscom's revised growth target hints at possible falling volumes. If volume growth is lower than expected for the top-rung companies, there might be a regressive trend in earnings. Which means that IT will no longer be the growth engine that everyone was hoping for.

Further, export dependent commodity companies have a bleak outlook for the future. Aluminium fell from around $1400 to $1250 levels. The US imposed anti-dumping duties on hot-rolled coils to protect its domestic industry.

Thus, like it or not exports with a proportion of less than 10 per cent of Gross Domestic Product(GDP) seems to be the immediate driver in the face of flat domestic demand growth. Expectations were that a good Kharif crop will drive consumption spending, which does not seem to have happened although it might be a bit early to tell.

Hopes are now being pinned on a good Rabi crop. But eventual growth has to come from investment and in an excessive over-capacity situation such as now, the only investments that seem feasible in the long-term are in infrastructure.