Banking stocks take charge

This week’s performance of the markets gave the investors something to cheer about. Barring the opening day of the week, the indices managed to close positive on all other trading days. Of course, there was intra-day volatility witnessed in the markets on each trading day. But the note worthy fact here is that everytime when the markets lost ground intra-day, renewed buying was witnessed in stocks which propelled the indices northwards. The BSE Sensex closed the week higher by 1.7% while the Nifty gained 1.6% over the week.

After closing the first day of the week on a negative note, indices found support on Tuesday from news, which trickled from the war front. With the US government getting closer to dethroning Saddam Hussein, optimism towards an early conclusion of war gained ground. Fuelled by the gains registered on the US markets, domestic investors decided to initiate measures at building up their portfolios. India being an emerging market and Indian equities trading at historic lows, investors took solace in the fact that the war is on the path of an early conclusion and moreover, reports that India is unlikely to be affected much due to the war, further perked up sentiments.

Banking stocks were in favour during the week. The optimism towards this sector could be a result of expectations being built that the bank rates could be further reduced by the RBI. The soft interest rate regime is likely to continue due to the fact that the desired credit off take was not witnessed in the economy. So, in order to fuel further credit growth and make borrowings more attractive for the corporate sector, the interest rates are likely to be pared.

An important event this week was the announcement of the EXIM Policy for 2002-2007. With an aim to increase share in global trade, the government identified services as one of the key growth engines for the economy. The government seemed primarily focused on services like tourism, entertainment, healthcare and education. One sector that seemed to have benefited by the policy is the IT sector. Measures like depreciation on manufacturing machines over a 3-year period and easy duty free imports for exports would help the IT companies.

Another news during the week was the announcement of the GDP growth numbers. With the economy painting a worrying picture in the third quarter of FY03 (GDP growth 2.6% compared to 6.3% in the corresponding period last year) and fears of weak Rabi crop, India Inc. is looking at a tough FY04. The primary cause of the fall in GDP was due to an 8% fall in the ‘agriculture, forestry and fishing’ sector.

However, a silver lining for the investors is the fact Indian companies have largely continued to grow by relying on cost efficiencies. Taking advantage of the prevailing lower interest rate regime, companies have managed to restructure their debts and lower their interest burden, which has helped them post decent bottomlines. It is interesting to note that in the last 8 years, net profits of India Inc. have grown at a CAGR of 16%. With the Sensex trading at sub-12 P/E levels and most blue chips trading at attractive valuations, it offers a good investment opportunity for the long-term.