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In the end...

Jan 15, 2005

Some may call it January blues. Some may call it a correction that was 'anticipated'. Some may call it the end of the bull run. But the fact of the matter is that the benchmark BSE-Sensex was down 3.8% in the last one week and is lower by as much as 7.6% in the last ten trading days. Here is the performance review of the stock markets in the last one-week and what lies ahead?It all started off with the release of the minutes on 6th January 2005 of the meeting of the Federal Open Market Committee that was held in December 14, 2004. The minutes not only indicated that the US economy is on its path to strong growth towards the second half of the calendar year 2005, but also highlighted some risks that include faster rise in interest rates and excessive risk taking in financial markets (Click here to read our article on the Fed meeting minutes).

Indian stock markets have declined. It is also the case with global markets as well. The Dow Jones Industrial Average has fallen by 1.6% in the last ten trading days. If one considers the Foreign Institutional Investors (FIIs) net investment in equities (graph above), it was on the 6th of January that FIIs turned net sellers in the Indian markets and they have remained sellers for now. Though net investment in equities by FIIs is still positive for the month of January 2005 (till now), in the last seven days, they are net sellers to the tune of Rs 4.6 bn in the domestic markets.

Top gainers last week…
(Rs)7-Jan-0514-Jan-05% CHANGE 52-WEEK H/L
BSE-Sensex6,420 6,174 -3.8%6,696 / 4,228
NSE-Nifty2,016 1,931 -4.2%2,120 / 1,292
Birla Corp168 183 8.6%185 / 47
iGate Solutions271 292 7.5%336 / 187
Punjab Tractors189 199 5.3%252 / 176
HDFC Bank490 515 5.2%530 / 262
Indo Gulf Fertilisers120 126 5.0%131 / 82
LIC Housing193 202 4.7%245 / 117
Mastek344 356 3.6%388 / 189
IDBI105 109 3.5%115 / 29
ING Vysya Bank583 601 3.1%692 / 221
P&G 567 581 2.6%605 / 360

Without dwelling deeper into the top gainers and losers in the last one week, despite significant selling pressure, there are companies that have gained! And this is what investors should appreciate. At the end of the day, stock prices trace the long-term growth in earnings, which in turn is driven by the strength of the management, business model and the competitive edge. What if the Bankex tanked last week? HDFC Bank was up 5%! While this is not to say that HDFC Bank is the best stock in the banking sector, there are companies who have consistent track record, trading cheaper compared to their asset value and will be the key beneficiaries of the India story.

Top losers last week…
(Rs)14-Jan-057-Jan-05% CHANGE 52-WEEK H/L
Sensex6,420 6,174 -3.8%6,696 / 4,228
Nifty Fifty2,016 1,931 -4.2%2,120 / 1,292
Nicholas Piramal280 244 -12.8%341 / 120
Ramco Systems437 382 -12.6%505 / 182
CMC728 641 -11.9%755 / 375
Sterlite Optical 88 78 -11.8%94 / 31
Polaris Software158 139 -11.7%262 / 114
Sun Pharma508 449 -11.5%569 / 293
BPCL457 405 -11.4%519 / 215
Ranbaxy1,201 1,070 -10.9%1,300 / 860
Cadila Healthcare570 508 -10.8%632 / 362
Syndicate Bank 62 55 -10.7%68 / 28

What to expect?
One of the excerpts from the Fed meeting minutes: Some participants believed that the prolonged period of policy accommodation had generated a significant degree of liquidity that might be contributing to signs of potentially excessive risk-taking in financial markets evidenced by quite narrow credit spreads, a pickup in initial public offerings, an upturn in mergers and acquisition activity, and anecdotal reports that speculative demands were becoming apparent in the markets for single-family homes and condominiums.

The lowering of interest rates in the US and the Federal Reserve's move to aid US economic recovery had created significant liquidity in the global financial markets over the last few years. The risk-return trade off, lack of economic growth in key developed countries and the new found interest for emerging markets resulted in these markets witnessing significant FII inflows. While we believe that the India story still remains intact from a three to five years' perspective, in the near-term, the stock markets are likely to be volatile. Without trying to be doomsayers, we believe that serious long-term FIIs will continue to find investment attractive in India and they are here for the long haul.

But the weakness in the Indian stock markets could arise because of lack of support. It is without doubt that FIIs have been one of the key market drivers in the last one and half years, thus acting as a strong pillar. What if the pillar weakens? Just because FIIs bought less or they have been net sellers has resulted in the stock markets tanking in the last one week. What if the selling pressure intensifies?

Can the domestic mutual funds (MFs) support the stock markets? Unlikely! If one considers the facts, the total assets under management of the domestic mutual fund sector as of December 31st 2004 stood at Rs 1502.6 bn as compared to Rs 1389.1 bn on December 31st, 2003 (an increase of 8.2% as per the AMFI website). However, if one compares the same figure between June 2004 and January 2005, the assets under management has actually declined by 3.4%.

What we suggest investors are to utilise the decline to buy into companies (not their shares) with a three-year view in a staggered manner to meet their future financial needs. Investing in stock markets just because FIIs are pumping money or vice versa is fraught with risk. In the end, fundamentals matter and more importantly, FIIs are not gods!


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