If stock market sentiment rode on'irrational exuberance' inthe first journey of the Sensex to 12,000, this time around it is creeping withcaution towards that milestone. The number is the same, but there is a widechasm between sentiment and forecast which makes it imperative that you realignyour portfolio to the current market truths.
In May 2006, when the Sensex peaked at 12,671, the indiceshad made a habit of breaking records. Every addition of 500 points was quickerthan the previous one, the Sensex overtook the Dow Jones Industrial Average andit seemed that the good times would be endless. The correction that camesubsequently was quick and scathing.
It took the Sensex only 24 sessions to fall from its highestlevel to its lowest this calendar year. Most analysts expected the correctionsto span over a longer period—four to six months, at least. But themarkets bounced back almost immediately and have been climbing steadily sinceJuly, leaving many as thrilled as they are surprised.
The difference this time
All said and done, 12,000 is 12,000 is 12,000, right? Turnsout it's not really, when it comes to stock market dynamics. Despite the quickrevival in the markets since the crash in May, the agony of seeing thousands ofcrores of market capitalisation wiped off in a single trading session andseveral stock prices plunging to their 52-week lows, has rendered investorscautious. The intelligent investor is not getting lured by speculativemovements in the stocks of smaller companies and obscure counters. The momentumin the market is largely due to frontline stocks.
To illustrate, in April, when the markets were reachingrecord highs almost every other day, total equity turnover at the BSE wasaveraging Rs 5,400 crore a day. In May, when the Sensex reached its highestlevel of 12,671, the average turnover was still robust at Rs 4,500 crore daily.This time around, the BSE is clocking an average of Rs 2,890 crore a day. Thisimplies that though the broad indices are moving up steadily, overall buyingand selling activity is still tepid. Investors, some of whom have not yetrecovered from the shock of the sharp fall in May and June, are looking atstock prices very differently.
While the Sensex has gained 14 percent and the BSE 200 over 10 per cent since the beginning ofJune, the BSE's Mid-cap index has lost 2 per cent and the Small-cap index has shed close to7 per cent. These indices were all posting over 25 per centgains between February and May, when the Sensex touched 12,000 for the firsttime (See sideshow: Performance ofIndices). This implies that the market movement thistime around is limited
to only a few stocks. The 'sidecounters', as non-frontlinestocks are referred to, have only just begun attracting some buying interest.
"People have missed the bus on quality stocks again. The'me-too' phenomenon will trigger people to get into bad stocks yet again. Theyshould try to avoid this," cautions Rajesh Jain, Director and CEO, PranavSecurities. In this scenario, despite the euphoria of the market returning tohigh levels, it would be advisable not to risk any purchases in companies andsectors whose fundamentals you are not certain of. Gains in the current rallyare limited to very few counters.
There is roomfor diligently picked stocks that can give you strong returns, even at thislevel. However, equally importantly, stocks that are not backed by strong fundamentalsshould be avoided, even if they are on strong bull runs currently.
FII movement
There are no arguments over the fact that the great secularbull run in the Indian markets has been fuelled by foreign institutionalinvestors (FIIs). The revival of the markets since their slump in May and Junecan also be largely attributed to them. In August, FIIs brought in a huge $1billion. This is over 25 per cent of what they have invested in Indian stockssince January 2006.
With the uncertainty over US Fed's policy on interest ratesabating a bit, dollar investments are confidently flowing into emergingmarkets, including India. What cues can you take from this? The opinions ofanalysts are mixed. On one hand, this implies that strong players in Indian stockshave a positive view about the markets here. They would like to keep the marketbuoyant so that there are buyers for their stocks when they choose to exit andbook profits. On the other hand, some analysts caution that the currentpositive sentiment in the market is a mirage and large investors who were stuckwithout an exit option in May and June are creating artificial exuberance tomake profitable exits now.
On a fundamental level, US consumer spending data hasindicated a slowdown and there are concerns that the US economy could beheading towards a recession. Other Asian markets have begun slipping because ofconcerns that this raises, but our markets are yet to react. Analysts cautionthat if a sell-off does ensue, it would be quick and scathing like the lasttime around. Whether the markets will recover from these corrections just asquickly is unpredictable.
India as an emerging market
When the markets tumbled this year, it was in response totremors that were felt in all emerging markets. The view that domestic bourseswere vulnerable to global factors and would increasingly behave in asynchronised manner with world markets, especially emerging ones, was strengthened.
In the resurgence since June 2006, however, Indian marketshave raced ahead of emerging markets. While the Jakarta composite recoveredover 8 per cent, others, including Korea and Malaysia, have appreciated only byover 3 per cent (See: Emerging Markets: Marginal Recovery). In fact, among theBRIC countries (Brazil, Russia, India and China), India is the only one that istrading with positive returns. China has lost 0.65 per cent and Brazil has shedover 1.5 per cent since June. This indicates that FIIs have overbought in Indiacurrently. If they start selling, our markets are likely to be the worst hit,according to analysts.
Be especially careful if you are buying stocks for the shortor medium term. Only commit to funds that you can live without, so that if themarkets slump, you are not forced to book losses in order to free up yourfunds.
Triggers
The market will take cues about its future direction fromseveral triggers. For one, interest rates would continue to spook sentiment.Though there is relief in this regard from the US for now, global interestrates remain a question mark. Analysts are closely watching the EuropeanCentral Bank and the Bank of Japan. Any announcement on possible future actionscould affect Indian equities.
Results in the next quarter will show how correct theprojected growth figures are. Current expectations are that these would not becontrary to market forecasts. However, there is a cloud of doubt over Q3results.
Fluctuation in oil prices, slowdown in the US economy andpolitical uncertainties could also sharply move the markets upwards ordownwards (See: Triggers for the Market).
Market outlook
The general sentiment about the market is different fromthat of the broad indices. While analysts are confident of the Sensex reachingeven 13,500 this calendar year, all stocks are not expected to grow at the samerate.
Some sectors have seen strong rallies in the past month.Select stocks in steel, cement, automobiles and banking have moved up. However,with the cycle of commodities turning, several industries are likely to comeunder margin pressure. For instance, steel prices are on their way up, so steelstocks are buoyant. In the last month alone, BSE's Metal index has gained 11per cent. Consequently, the auto industry's margins are getting squeezed andthese stocks might see some profit booking.
Whether their reasons for having faith in the bull runcontinuing are fundamental or technical, the fact remains that no one sees aproblem in Indian equities in the long run. In the short and medium term, acorrection is not only anticipated, it is even welcomed. Analysts are, however,largely of the view that the corrections may not be as sharp as the last one.These could spread over a longer period of time, they guess.
With the markets running up significantly again, the outlookon the valuations of certain sectors is raising concerns. Infrastructure andconstruction have been big themes this year, but are becoming areas ofexcessive speculation. Companies in these sectors are highly overvalued, withprojections of explosive demand growth. Several dubious companies are nowtrying to change their names and add 'construction', 'infrastructure' or 'realestate' and thereby cash in on the frenzy that has been generated in thesesectors. You must make sure the credentials of the company you are investing inare sound. The biggest IPO due to hit the market, that of DLF, has also beenput on hold. Market analysts say the company is reworking its valuation and theoffer, when it comes, would be substantially lower than the earlier figure.
With twosuccessful IPOs in August, Tech Mahindra and GMR, the confidence of issuers hasincreased. In the two previous bull runs in our markets, gullible investorshave fallen victims to IPO mania and lost their money, so be judicious thistime around.
Your strategy
All factors considered, your investment strategy should bedriven by caution. There certainly are 'buy' opportunities, even in what isslowly being felt is an overheated market. But these should be restricted tofrontline counters, in companies that are soundly managed. "The markets couldgive 5 per cent upside in the next month on good stocks," says Jain.
If your investments in smaller stocks are currently tradingin the positive zone, it would be wise to book profits on them. There has notbeen much traction in small- and mid-cap counters in this rally and the risk ofcontinued holding may not be worth the return.
It would be prudent to consider exiting some of the stocksthat have not seen any positive news flows or price movements, even at a loss.Brokers are telling investors to ensure stop loss levels and adhere to them.With likely corrections around the corner, these stocks may slip further.
"Even though the markets are likely to move up to 12,700 andbeyond this calendar year, individual companies must be analysed before theirstocks are bought. If you stick to the top 50 or 100 companies, then your risksare that much lower," says Roop Chand Betala of Betala Stock Broking. If youare not, watch your fingers, the fire could get you!.
Triggers for the Market
- Interest ratesÑespecially in Europe and Japan
- Q2 results
- Oil price
- Slowdown in the US economy
- Political uncertainty
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