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Drifting lower...

Mar 20, 2004

It was a week, which not most investors would like to remember, as both the indices tumbled on the back of across the board selling. The weakness during the week was also characterized by two big falls on a couple of occasions. At final count, while the BSE-Sensex lost 4.5% during the week, the NSE-Nifty closed lower by 4.8%. Index heavyweights played an important role in the current weeks fall.

Starting from where they left off last week, the indices continued on their downward journey right from the word go on Monday morning. The fall on Monday was of the magnitude of 180 points on the Sensex making it one of the biggest falls in recent times. This bear carnage was followed by a couple of days of consolidation on the bourses, however, not without its share of volatility. But the peace could not last for long as panic once again struck investors and they went on a selling spree bringing the Sensex lower by 120 points. While there are no specific reasons for the current bout of weakness, it largely seems profit taking by investors who seem concerned about the uncertainties with respect to the impending general elections and the start of the results season in barely a couple of weeks from now. However, it must be noted that the biggest supporters of the current bullrun, the Foreign Institutional Investors (FIIs) community, have continued to buy into Indian equities.

Top 5 gainers over the week (NSE-50)
COMPANY Price on March 12 (Rs) Price on March 19 (Rs) % CHANGE 52-WEEK H/L (Rs)
BSE-SENSEX 5,700 5,443 -4.5% 6,250 / 2,904
S&P CNX NIFTY 1,812 1,725 -4.8% 2,015 / 920
INFOSYS 5,037 5,189 3.0% 6,100 / 2,300
NALCO 181 186 2.9% 206 / 70
SATYAM 303 307 1.5% 425 / 127
DIGITAL GLOBAL 836 837 0.1% 881 / 350

Among certain factors being cited as the probable reasons for the negative performance of the indices over the last couple of weeks is the redemption pressure being faced by mutual funds from their corporate clients. Advance tax payments and investments with respect to tax planning instruments could have further aggravated the situation. The fact that the domestic mutual funds industry has pared its exposure to capital markets is also vindicated from an article in a leading business daily, which states that the cash holdings, as a percentage of their total assets under management, amongst mutual funds has been on a rise.

Now, considering the losers and gainers this week, interestingly, amongst the only 4 gainers on the NSE-50, 3 were software stocks (see table above). It must be noted that the domestic software sector stocks had received considerable hammering in recent times owing to the US outsourcing backlash. However, some recent positive developments in the form of support from Fed Chairman, Alan Greenspan and US Secretary of State, Colin Powell, who favoured the phenomenon of US outsourcing, led to investor interest flow back towards the sector.

Top 5 losers over the week (NSE-50)
COMPANY Price on March 12 (Rs) Price on March 19 (Rs) % CHANGE 52-WEEK H/L (Rs)
SAIL 41 35 -13.9% 62 / 9
SCI 148 129 -12.7% 203 / 50
TATA TEA 359 319 -11.2% 420 / 170
SUN PHARMA 680 609 -10.5% 725 / 261
BHARTI TELE 151 136 -10.0% 168 / 27

Going forward, since the valuations have clearly corrected upwards over the last one-year, we believe value buying in most of the index stocks is over and further rise in stock prices have to be accompanied by higher growth in revenues and profitability. In fact, over-valuation in certain key stocks and sectors cannot be ruled out. However, since we believe that the long-term prospects continue to remain promising and equities, as an asset class, are likely to yield better returns, it is better to be selective while investing in equities from hereon.


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