The sustained weakness of the market has puzzled many. Often it is arguedthat we are in a bear market. But some find it difficult to understand whyshould this be so, given that the Indian economy is on an even keel. The GDPgrowth is steady and the future looks promising. Even the corporate resultsare impressive. So what is the problem?

The problem is with Nasdaq. With the Fed expected to jack up interest rateby half a per cent, the equity investors in US are a seriously worried lot.The interest cost to the US industry would go up. Not only that higher bondinterest would attract funds away from equity markets.

The higher interest cost has the potential to disrupt the run of corporategrowth that US has witnessed for quite some years now. Allan Greenspan'sconcern is about the high exposure of banking institutions and evencorporates into the equity investments in Internet related stocks.

And it is everybody's knowledge that Internet stocks have been valued atastronomical multiples. There was an inbuilt potential for an asset meltdownas happened in the real estate investment by banks in south east Asia. TheFed is acting in advance to prevent a crisis. The question is will itprecipitate a crisis of a different kind. If interest costs go up for the USindustry it could trigger a cycle of events.

As is argued in `chaos theory' one small trigger could end up producingquite unexpected results due to synergetic and cascading effects of severalother factors in the economy. The rise in interest rate alone will shiftsome funds towards debt from equity. But imagine what multiplier effect itcan have if you build in the meltdown at Nasdaq. It is not impossible thatthere would be increasing mass of investors wanting to get out tech stocks,before stock prices nosedive further. The fact that valuations have beenhyped up make it all the more urgent to press the sell button. If you didnot sell now, your investment value could get reduced to half or one-third!That can be a powerful drive to get out of stocks and the hike in bond rateswould add only fuel to the fire.

Now the act of getting out of stocks is trying to backpedal on the wealtheffect game. The US economy has been growing on the basis of this wealtheffect, of millions having earned it in stocks.

Consider what would be the impact on consumer spending. As stock marketstake a southern dive, consumers could cut back on their spending. That inturn will trigger of a downtrend in the corporate sector. With higherinterest costs and the top line and bottom line growth constrained, thecorporate sector could start cutting back on capital expenditure and furtherexpansion.

So the cycle could snowball.

The cycle would have important implications for the global economy. If theUS economy slows down, it would affect US imports. Many of the south eastAsian economies have a strong export component to their GDP growth. Theywould obviously take a dent. And again that would set off a chain withinthese countries. As global portfolio managers rate both the country and theindividual companies there together, even portfolio investments in thesecountries will be dampened. The important thing is to realise that whatseems to be inocuous at first look may indeed have far reachingimplications. As to how each of these Asian tigers as also China, Indonesiaand Japan handle this would be depend upon the blend of each one of growthbased on domestic demand and export.

But one thing appears certain. Invesments in south east Asian region,country by country is likely to be reviewed seriously. Perhaps there liesthe potential for the Indian stock market. The Indian economy is not highlydependant on export, except in software area. It is important to look intothe implications for the Indian software industry. Should the US companiesfind it necessary in the new circumstances to go slow on expansions andtighten on expenditure, software exports to US can come down. This one needsto keep in mind while trying to forecast earnings in software scripinvestments made now.

Closer home the stock markets would continue to wait and watch the monsoonbehaviour. Finally let us try and sum it up.

Developments in US economy have the potential to keep stock marketsdepressed for a considerably long time. Software stocks could lose theirmagnetic attraction and values may seek more realistic levels, closer totheir financial performance. Non-software stocks would dip to attractivelylow level. But investors may have to wait for upto two years to earn thereturn. The return however could easily be atleast sixty percent over thetwo year span. Value investing could again come back to centre stage. Sowhat choices are you left with? Surely you need to swith to the long terminvestment mode. Choose growth stocks and at prices which have a relation tofundamental performance.

As to where the market bottom is, one needs to deliberate. But in essencethere is no need for hurrying into the investment mode. The most sensiblething is to wait to see the bottoming out happen. And time has arrived tohave a balance portfolio, in case you have got skewed.