Weekly outlook for the equity market is bleak, to say the least. Foreign institutional investors’ sell-off is unlikely to stop immediately.

Local players are showing signs of being scared. The way valuation architecture is crumbling has made investors waver on their convictions. Fundamentals lose relevance in this kind of unusual time.

But are the fundamentals all right? Anecdotal evidence suggests consumer goods and durables are moving slowly out of the shelves; real estate prices have come down, but they are not being sold off at a breakneck speed. Automobiles are moving off the showroom at a slow pace. Consumer is thinking twice before opting for borrowing. Fixed deposits are back in fashion.

True, the real estate sector and non-banking financial companies have not yet reported trouble. But the market is apprehensive.

Those who expected stronger signal from the RBI this week for reversal in interest rate cycle have to wait.

The second quarter results for the manufacturing sectors have been showing cost pressure and certain moderation in sales growth. In the third quarter these two factors may undergo changes.

Drop in margin in the second quarter was largely balanced out by increase in sales. In the third quarter, cost pressure may come down because of weakening of commodity price, but overall demand slow down may impact sales at a higher rate. Policy makers are aware of these possibilities and the extent of their impact on the valuations of stocks.

But accelerated flight of capital from Dalal Street, “hot” or “cold”, changes the valuation game all together.

This is a transition period. How long it would continue is a matter of speculation. Once the dust settles in the global arena, Indian equities are likely to emerge as one of favoured assets to invest in. Fundamentals would surely play their role then.

Dalal Street valuations may be at a serious discount to the current levels until that magic moment. Optimists hope that it would come early, certainly before fundamentals undergo a revision.

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

© Copyright 2000 - 2009 The Hindu Business Line