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Investors shy away

Aug 3, 2002

It was another downer this week. July has definitely not been a good month for investors with the Sensex and Nifty losing 10% and 11% respectively in market cap. At the same time, Dow and NASDAQ were lower by 8% and 10% respectively. With the economy on an upturn and the troubles of last summer left behind, one wonder's, what's the panic? Digging a little deeper to find the malaise, after the markets topped out in February '02, prior to the budget, which has become sort of a ritual, it has been mostly downhill. Data on mutual funds and foreign institutional investors (FIIs) -- among the more influential players -- suggests that they have tended to follow a contrasting investment pattern. Over the past two years, mutual funds have been net sellers while FIIs have been net buyers of equities. The net selling by mutual funds is reflective of the exodus from Unit Trust of India (UTI).

That said, post March '02, with outbreak of communal tensions followed by Kashmir conflagration topped with advisories, the ardent supporters -- FIIs -- turned net sellers between April to June '02. With key influential participants turning sellers, markets were headed only one direction. Over July '02, foreign portfolio investments have returned but are likely to have just evened out negative flows of mutual funds. Among mutual funds -- we suspect -- that with the rally in small and mid cap stocks, several private mutual funds have churned their portfolio to ride the current wave, which gets reflected on the broader market but not the benchmarks. UTI, on the other hand, reportedly, has been exiting from key blue chip counters, which suggests higher net sales on the benchmarks leading to pressure on indices.

As per reports and trader opinions, liquidity of a leading Mumbai-based operator is in question. Commercial banks holding collateral are likely to be liquidating stocks to recover borrowings. Loan against shares are generally offered on leading A-group shares, which again puts pressure on benchmarks. As a results the weakness on the narrow gauge of equities seems to be more due to technical factors -- lack of buying support. Retail investors, the other key player, we suspect, is likely to be on the sidelines not exerting influence to counteract the selling. Retail investors, historically, are known to be late joiners and not originators of a rally.

Growth in six core sector industries, which constitute 27% of the Index of Industrial Production (IIP), suggests that the economy in on an upturn. The six industries reported a 5.7% YoY growth in 1QFY03. Monsoons are a concern and likely to affect the industrial economy with a lag but the extent of impact is a grey area. Does it warrant a 10% drop in market cap? It seems, with monsoon reports dominating headlines of leading dailies and stock market channels, investor reaction is likely to border on excesses. In FY00 and FY01, agriculture reported growth of 3.1% and -6.6% respectively while GDP grew by 6.1% and 4%, which indicates industry & services grew by a higher figure. In FY02, GDP grew by 5.7% when poor agriculture performance in FY01 was to take the 'lagged effect'.

While corporates could be affected by poor monsoon, managements, especially good ones, are in place to overcome roadblocks and ensure bottomline growth. One that instantly comes to mind is HLL. Technically, the Sensex is weak. After facing resistance at 3,350 levels, it has been a sharp slide. Markets have some support at current levels of 2,950 levels. Breaking these levels, next support is at 2,750 levels before touching October '01 lows. Investors, as mentioned in earlier reports, need to recognize the strengths of the country.

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