Markets: What lies in store? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Markets: What lies in store?

Mar 6, 2007

The past three months (December 2006 to February 2007) have been pretty ominous for the Indian stocks markets. The period has seen high levels of volatility in the broader markets due to a host of factors, both global and domestic. In fact, in the past few sessions, weak trends in the global indices have taken its toll on the Indian indices leading to a correction in the latter. In this article, we shall benchmark the performance of some of the sectoral indices against the Sensex in the past three months and guage how they have fared.

Key sectoral indices
Index 02-Mar-07 01-Dec-06 % Change
BSE IT 5,142 4,954 -3.7%
BSE-Sensex 13,845 12,886 -6.9%
BSE Healthcare 3,770 3,490 -7.4%
BSE Auto 5,473 5,016 -8.3%
BSE Bankex 7,290 6,447 -11.6%

Software: While the BSE IT index lost 3.7% in this three month period, the fall nevertheless was much lesser than that recorded by the Sensex. It must be noted that Infosys, Satyam, TCS, Wipro and HCL Tech collectively account for over 90% of the weightage of the BSE IT index. While the Union Budget has made MAT applicable on IT companies, the same is not likely to impact the top tier companies significantly going forward. However, the fringe benefit tax levied on ESOPs could prove to be a dampener, as these companies use ESOPs to lure talent given the high attrition rate witnessed by the industry. Having said that, from a long-term perspective, we believe that these top-tier software companies, with their superior scalable business models and stronger operating metrics relative to their mid-sized peers, will benefit more from the offshoring story, and we remain positive overall on the sector.

Markets: You are not alone!

Healthcare: The healthcare index lost 7% during the three-month period. This is despite the fact that most of the domestic pharma companies posted strong results for 3QFY07. For companies such as Ranbaxy, Dr. Reddy's, Nicholas Piramal, Biocon and Wockhardt, growth during the December quarter was driven by increased contribution from acquisitions and traction in export sales specially in the global generics market (driven by product approvals and exclusivity periods). For MNC pharma majors, however, the picture was not too rosy as their sales (focused largely on the domestic market) were largely hampered during the quarter. Going forward, while we are positive about the growth prospects of both domestic and MNC companies alike, we, nevertheless, advise investors to adopt a stock-specific approach while investing in the sector.

Auto: The auto index fell by 8% between Dec 2006 and Feb 2007 mirroring the trend witnessed across most of the indices. This was despite the continued robust sales numbers posted by auto companies across segments in both December and January on the back of strong macroeconomic fundamentals. It was being feared that with inflationary factors in the form raw material cost escalation, crude oil prices, and interest rate hikes looming large before the sector, the performance might witness a downward spiral. The fears however proved to be unwarranted as auto sales have remained firm and have thus enabled the companies to mitigate the effects of higher input costs. Going forward, however, we expect pressure on the cash flows, given the substantial capex plans lined up by companies as also due to rise in interest rates. Further, if the growth in the industry does not pan out along the expected lines, break even for the new capacities might just get prolonged.

Banking: Banking stocks took a beating in this three-month period shedding nearly 12% on the back of inflationary concerns and steps taken by the RBI to curb the excess liquidity in the system. The RBI had increased the cash reserve ratio (CRR) by 50 basis points to 6% in two stages for the second time this fiscal in February, which is expected to drain out liquidity to the tune of Rs 140 bn and prompt banks to go in for another round of across-the-board interest rate hikes. It must be noted that the RBI had last hiked CRR by 50 basis points effective in December 2006 and January 2007. It also had hiked its overnight lending (repo) rate by 100 basis points and overnight borrowing (reverse repo) rate by 50 basis points since April 2006. The monetary tightening came in the wake of the banking system getting comfortable with liquidity on continued foreign fund inflows. Inflation based on WPI had risen to 6.6% in February 2007 and concerns regarding the squeeze on net interest margins and asset quality seemedto have taken its toll on banking stocks.

Of'Asian' flus and global cues

To sum up...
While the past few weeks have seen tremendous pressure on stock prices, we believe that investors should take this opportunity to invest in companies (stocks) that have strong fundamentals and reasonable valuations from a three to five year perspective. The India growth story remains intact and investors need not shy away from equities but invest in the same giving due consideration to one's risk-return profile.

Equitymaster requests your view! Post a comment on "Markets: What lies in store?". Click here!


More Views on News

How Much Money Should an Investor Set Aside for Trading? (Fast Profits Daily)

Sep 21, 2020

In this video, I'll give you a simple equation which you can use to decide how much money you can set aside for trading.

Kotak Standard Multicap Fund: Strategizing Growth with Focused Approach (Outside View)

Sep 21, 2020

PersonalFN's analysis on the features and performance of Kotak Standard Multicap Fund.

Sensex Can Go to 25,000 Before it Goes to 60,000. Are You Prepared? (Profit Hunter)

Sep 21, 2020

Am I expecting a big crack in the Sensex and what next?

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

Sundaram Bluechip Fund: Will Hold the Stable Horses (Outside View)

Sep 18, 2020

PersonalFn briefly outlines the newly launched NFO note HSBC Corporate Bond Fund.

More Views on News

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why am I Recommending Caution? (Fast Profits Daily)

Sep 9, 2020

This is why I have changed my short-term view on the market.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Sep 21, 2020 (Close)