May 6, 2003|
If one were to look at the trend in the stock market over the last few months, it has been a range bound activity. What one means by range bound activity is that there is only stock specific buying activity while the overall sentiment continues to remain one of caution. This results in benchmark indices moving in a specific range, which has been the case in the last few months.
Though investors' seem to be waiting on the sidelines at the current juncture, foreign institutional investors have been heavy buyers since January 2003. Though there has been marginal dip in net investment, looking from a point-to-point basis, one has seen solid inflow of money. This has come at the time when there is uncertainty over the global economic growth prospects in light of the ongoing SARS issue and the Iraq war.
This is commendable and solidifies the fact that valuations are compelling when one looks at the broader parameters. In times like these, as has been the case historically, investors' typically wait for a rally to begin and then jump onto the bandwagon. Besides, obvious long-term triggers like valuations are sidelined and markets look for immediate triggers like say, disinvestment.
Unfortunately, there has been a lack of positive inflow of news in the recent past. What one has seen starting 2001 till December 2002 is that select sectors like steel, technology and auto have seen big upward movement and then a brief fall amidst a range bound index. It seems that it is the turn of the banking sector currently. As we have maintained before, one has to exercise caution on this front. Valuations of some stocks have been stretched. Though there are positives like the passing of the Securitisation Bill and decline in interest rates, it always pays to be cautious.
Instead of trying to identify the 'next sector' that will see a rally, a retail investor is better off investing in stocks that have proved their mettle. But there is no surety that those who have done well in the past will replicate the same in the future. Clear examples are erstwhile blue-chip stocks like Arvind Mills, Century Textiles and Bombay Dyeing. Though they were successful in early 1990s, sustaining their leadership in the sector has been an uphill task. The stock verdict - all the three are trading at historically low levels compared to early 1990s.
The key is to identify companies with management depth. It is easier said than done. In uncertain times, management depth in a company is of big significance and usually this is a factor that separates wheat from chaff. Though it may take some time for the stock markets in general to realize the fact that valuations are attractive, it has been often said by investment gurus that 'markets remain irrational as long as investors' are solvent'. Happy investing!
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