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Rally: Broad based... - Views on News from Equitymaster
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  • Aug 29, 2003

    Rally: Broad based...

    Market sentiments continue to remain bullish despite political risks (general elections) and the recent bomb blasts. Should investors be apprehensive of the recent rally and should investors stop investing in the stock markets at the current levels? We try to take a look at some of the key reasons driving the rally.

    For one the rally has been broad based encompassing many sectors. For instance the BSE capital goods index outperformed the Sensex during last one year. Passing of electricity bill was the key trigger to the movement in the stock prices as investments are expected to be significant in generation, distribution as well as transmission in the medium to long term. This is also apparent from the strong order books of companies in the engineering sector. Power being the backbone for the country's growth is a major segment and reforms when they materialize will significantly lead to higher investments. This apart in case of engineering companies, increased infrastructure activity and to a certain extent the revival in industrial activity also led to stronger order books.

    PSU stocks especially energy sector stocks also saw a lot of activity off-late. Post APM dismantling the companies took benefit of higher crude oil prices and also higher volumes led to significant improvement in the profitability. Other PSU stocks like SAIL and NALCO also performed significantly during the period. Increasing demand both from domestic and international markets for steel led to higher volume growth and also higher realizations. In case of the aluminum sector also, demand and prices are both rising and companies have reported significant improvement in their profitability.

    Banking stocks have also been in the limelight. Passing of the securitisation act, talks of return of capital to the government and strong growth from the retail segment led to increased optimism towards the banking sector. The auto sector saw strong volume growth in FY03 and this has improved sentiments towards companies in the sector. Also, softening interest rates on financing of vehicles have led to strong volume growth. Pharma companies have also become more efficient and increased focus towards R&D and a number of successes in getting approvals from US FDA have increased investor confidence towards them. They are increasingly going global and global majors are also looking at India as a potential platform for outsourcing.

    However there is another side to this coin. Software and FMCG stocks were not in the hot list of investors. Poor monsoons in 2002 resulted in sluggish demand in case of FMCG sector. This apart due to increasing competition, the companies resorted to price cuts in order to gain market share. This impacted their balance sheet adversely. Hence these companies could not attract investor attention. The software sector, which has been the darling of investors in the past has not participated much in the current bull market. Increased pressure on billing rates, slow down in global IT spending and higher competition from global majors that are setting up their own outfits in India have been the dampeners for the sector.

    So what now? Monsoons have been reported normal during the current year, this may increase demand in sectors like FMCG, auto and other related sectors. Thus positive news regarding monsoons and expected higher GDP growth has further increased investor optimism towards the growth of Indian economy. Thus, while the markets seem stretched in the short term, from a long-term perspective we still believe that Indian stock markets hold a lot of potential. However various state and the central elections expected in the near future may impact sentiments to a certain extent.

    We believe that the current rally is based on fundamentals to a large extent, barring a few stocks that have been driven purely by speculation. Investors must however exercise caution at this stage and not invest in stocks, which they have not researched adequately. Stay invested in quality stocks with a sound management having clarity in vision, good track record and also its commitment towards shareholders in terms of value creation.



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