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Stock markets: Skewed towards risks - Views on News from Equitymaster
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  • May 7, 2004

    Stock markets: Skewed towards risks

    The stock markets have been witnessing considerable volatility in recent times. Infact, since the onset of 2004, they have been showing signs of confusion, thus rendering investment decisions a difficult task indeed. Against this backdrop, let us see which sectors managed to outperform the industry in 2004 and how different were they from the heady days of 2003.

    As you can see from the chart above, four indices viz. Auto, Capital Goods, PSU and Healthcare had managed to outperform the BSE-Sensex by a considerable margin. It should be remembered that auto and capital goods are the kind of sectors where the effect of economic recovery is felt the earliest. Thus, while robust GDP numbers continued to trickle in, these two sectors witnessed significant improvement in their profits, which ultimately got reflected in their stock prices. The healthcare index on the other hand, gained for reasons other than domestic economic buoyancy. Led by increasing outsourcing opportunities and brisk sales in the international markets, the sector companies, especially the mid-caps, underwent significant buying interest.

    While subdued topline growth on account of poor monsoons in 2002 led to the FMCG index under performing the Sensex, the IT index also emerged as a laggard, mainly on account of relatively higher valuations and pressure on margins.

    Thus, while improved economic scenario helped, the fact that the indices were languishing at lower levels and were significantly undervalued at the start of the year, resulted into such robust gains.

    2004 started with a bang with the Sensex reaching an all time high and crossing the all-important barrier of 6,000 during the first week of January itself. But it was a topsy-turvy ride from there on. While profit booking and a slew of IPOs did their bit to cause the weakness, continued growth in the country's economy and bargain hunting at lower levels prevented the markets from falling too much. The volatility further intensified on account of uncertainty over the formation of government at the center in the wake of the general elections. Amidst all this, as is clear from the chart above, the Sensex has seen a decline of 2% and surprisingly the sector indices, which had managed to outperform the Sensex in 2003, did the same once again, but by a relatively lesser margin this time.

    What really came as a surprise was the severe underperformance of the FMCG sector. While the sector was expected to gain on the back of good monsoons witnessed in 2003, the unleashing of price wars in the detergent segment and intensifying competition saw the sector bellwether, HLL and other sector stocks in general, witnessing selling pressure on the bourses. On the other hand, as we had mentioned earlier, auto and stocks from the capital goods sector looked over valued from a medium term perspective and hence have failed to ignite the markets in a big way.

    Having analysed the situation over the past few months, what does the future look like? First of all, the soaring crude prices have to be viewed with caution by investors. Higher crude prices could dent the country's already poor financials, inflationary pressure in the future also cannot be ruled out. In this scenario, whether inflation can be maintained at the current level as perceived remains to be seen. If not, the reasons for raising interest rates from the Reserve Bank of India's perspective strengthen further. So, be aware of such developments.

    While the policy makers will have us believe that the country's economy has the potential to consistently grow at a double-digit growth rate, without adequate job creation and investments in infrastructure, such a task seems a little unrealistic. Therefore, the policy decisions taken by the new government become extremely crucial and unless some clarity on the same emerges, the risk return ratio appears to be skewed towards risks.

    Even if the prospects look promising from a long-term perspective, we would suggest investors to exercise utmost caution while taking investment decisions.



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