MUMBAI, November 2: Would the Indian stock markets continue to fall as the markets resume trading on Monday is the question uppermost in the minds of many. The recovery noticed on Wednesday was aborted on Thursday as Hong Kong went into a bout of correction, and other bourses around the globe reacted in sympathy once more. The Sensex sank to a low of 3803.

One might as well check out one's moorings when you get caught in this kind of whirlpool. A flash back into the past also helps you to get a measure of the temper of Indian stocks.

The Sensex, you will recall had hit the bottom around 2800 in December last. That was desperation personified, not in the context of global markets, but reaction to the politico-economic turmoil at home. Remember how quickly it recovered to 3400 levels? It did because some one realised that stocks had become pretty cheap then.

From Hong Kong to Wall Street, the bottomline to stock prices is how overvalued or undervalued is your market and your stock. The Thailand crisis first, Malaysian next and the Hong Kong crisis now have brought out in bold relief how the valuation of the particular country's strength or weakness provides the turf on which the game is played.

The Thai Baht collapsed because much of the economic engine was being driven much more by funds from abroad than home grown savings. Malaysia too has a similar story. And now it is the turn of Hong Kong.

The macro economic parameters of each of these countries have their unique composition. The vulnerability of these countries to a run on their currencies or their equity markets is inherent in the nature in which their economies are managed.

The point is what happenned in Thailand will not happen in India. But contrast this what is happening in the US markets right now. Even though the economy there is on a strong wicket, the Dow Jones is reacting not only because of international happenings, but also because intrinsically it was overvalued.

But the stock investor needs to understand that overvaluation or undervaluation is part of the stock game. In the US case, the Dow Jones had risen on expectations of a stronger growth and better corporate profits. As investors expect better returns and stronger growth they are prepared to pay even higher.

Now let us go back to the Indian scenario. In June this year the BSE Sensex leaped up from 3800 stepwise to 4000 and then to 4200. But when it continued to rise to 4600 after a halt, this writer, like a few others were surprised. For certainly 4600 was overvaluation for the market at that point of time. Soon the market came back to 3758 and started recovering and touched 4166 before the present slide started. Again it was a process of correction for overvaluation. With second half results round the corner, one had started wondering how far the rise to 4166 was justified.

In fact before the Hong Kong crisis surfaced, the Sensex had already started into another bout of correction from 4166. The global crisis only hastened the process. But it also brought the international dimension into play. Zeroing down to the prospects for next week, you must take the following account: # Muhurat Trading Volumes were low - often one-third of previous day. So the market drop on that trading is not representative.

# Thursday's drop in Sensex has been majorly contributed by Reliance Industries, State Bank and Hindustan Lever. They have shed some value in the light of FII unloading for redemption elsewhere. They have shed fat, which otherwise they carry easily.

# Sensex is close to 3762, the previous bottom, from which the recovery had started earlier. In sum, you cannot escape notice that stocks in most cases have reached levels, which they can sustain. They can sustain the current price levels even discounting the likely first half results expected now. There is no knowing if FIIs will press sales further. Some more fat could be shed by the plump scrips. But overall one thing is certain. If values drop further, it means that scrips are getting undervalued in terms of their global potential. And remember this. As FIIs take stock again, they need to revert to India more than ever before with the other Asian markets becoming even more uncertain. That should provide the anchor for you more than ever before with the other Asian markets becoming even more uncertain.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.