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Big picture counts

Jun 3, 2003

The current year has been eventful for the stock markets and has seen different trends with respect to different sectors. The case in point is the fact that this has been the year in which software stocks have seen losing their luster while banking stocks have risen to prominence. However this also seems a year when confidence among investors has been rising steadily. But having said that this also seems a year when speculators have had their day.We are referring specifically to the banking sector, which has seen sharp erosion in stock prices in the last two days. In our previous article we had reiterated that investment decisions based on unconfirmed news are risky and retail investors should desist from the same. While bank stocks have been gaining for fundamental reasons we believe the recent run in the prices of PSU banks have gone far beyond their valuations and seemed more speculative in nature.

Retail investors need to look at the long-term prospects of a particular investment in order to ascertain the investment worthiness of the same. In case of banks, in the ensuing run on the stocks most investors seemed to forget that the issue of return of capital to the government is a sensitive. What we are trying to imply is that while it was a significant positive for PSU banks, expectations preceded facts. Before any confirmation on this issue could be made stock prices ran up.

Similarly, while the Indian software industry story still remains intact, valuations continue to be driven by the smaller picture. By the smaller picture we mean, pressure on operating margins in the short term and hence the pressure on earnings. However, the bigger picture is that of Indian companies significantly boosting their topline going forward due to greater acceptability of the Indian offshoring model. Indian software companies in the long run will be able to successfully maintain robust topline growth thus compensating for drop in margins. The bigger picture also involves the fact that Indian software companies are slowly moving up the value chain and this will further add value in the long-term.

Whether it is banking stocks or software stocks one fact is clear, valuations even now are driven more by news than by facts. Another fact is clear, stocks with strong fundamental weather short-term storms, a reflection of their long-term fundamentals. We would like to point out for the benefit of retail investors that, predicting the reasons for sharp rise or fall in prices of stocks will be a difficult proposition. Hence, it is in their interest to reduce their reliance on 'hot news' and look at the bigger picture. And part of the bigger picture is the quality of the management and its vision for the company.


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