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Interesting times!

Dec 11, 2004

After the euphoria that was witnessed during the previous weeks, this week marked a return to caution as both the benchmark indices, the Sensex and the Nifty declined over 1% each. While there was buying witnessed across select sectors like telecom, others like software, FMCG and banking witnessed a sedate journey throughout the week. After a dull close to the week ended December 3, while the markets opened strongly on Day one (Monday) of this week, caution set in and the consequent profit booking led to the markets weaken as the day progressed. Market players booked profits at every bounce-back. This weakness continued even on the subsequent two daysí trades with the Sensex oscillating near the 6,300 levels. Profit booking at higher levels seemed to be the most obvious reason for these daysí fall. At near 6,300 levels, the markets have been in uncharted territories and caution was looming large. These three days of despair were then followed by a day of buoyancy on Thursday as the bulls got back into action with the Sensex crossing the 6,300 levels again. But this optimism remained short-lived as the markets closed over 1% down on the final trading day of the week, Friday.

Key gainers over the week (NSE-50)
CompanyPrice on Dec 3 (Rs)Price on Dec 10 (Rs)% Change52-Week H/L (Rs)
TATA CHEM 148 162 9.1%189 / 94
ACC 293 314 7.3% 319 / 220
BHEL 642 684 6.5% 690 / 375
INDIAN HOTELS 494 524 6.0% 535 / 321
ZEE TELE 151 158 5.2% 175 / 100
Note: Click on the link above to read our view on the company/sector

Now considering some stock specific action on the bourses, the losersí table below shows that 3 of the 5 top losers amongst the Nifty stocks this week were from the Reliance Group. While much has already been said about the implications of the current imbroglio created by the management of the Group, we would like to mention here that the Group, as a whole, benefits from synergies and that the outcome of the current situation will have a lingering effect on the way things pan out of the group companies in the future. Confidence and stability in the top management is extremely critical when it comes to the comfort factor for retail and institutional investors. Continued spat by the top management of the Group is thus likely to dent this confidence and consequently, have an adverse impact on valuations.

Key losers over the week (NSE-50)
CompanyPrice on Dec 3 (Rs)Price on Dec 10 (Rs)% Change52-Week H/L (Rs)
BSE-SENSEX 6,323 6,234 -1.4% 6,386 / 4,228
S&P CNX NIFTY 1,996 1,969 -1.4% 2,015 / 1,292
RELIANCE ENERGY 581 506 -12.9% 818 / 426
RELIANCE 544 499 -8.2% 650 / 382
PNB 379 355 -6.2% 408 / 176
IPCL 186 177 -5.0% 240 / 106
HCL TECH. 367 349 -4.9% 407 / 234
Note: Click on the link above to read our view on the company/sector

Coming back to the present state of the Indian markets, the very fact that they have breached their all-time highs requires investors to practice utmost caution with respect to their equity investment decisions. Further, with interest rates on the rise, stocks, especially from industries that are capital intensive and have a high debt to equity ratio should be avoided. While we are not trying to take the role of a 'doomsayer', we are concerned about is the fact that markets are seemingly not taking into consideration the various risks that cloud the horizon. For instance, one of the biggest factors that are helping Indian markets currently is the incessant flow of FII money.

However, it is important to note that the pressure on the US dollar on account of the huge US current account deficit has the ability to deepen further. A rapidly depreciating US dollar may have inflationary effect on the US economy, which may further result in the Federal Reserve raising interest rates faster than expected. With job recovery, consumer spending, manufacturing index all showing good numbers off late, a faster US economic growth has increased the chance of faster rise in interest rates in the US. And this might be a big reason for the 'much-touted' FII money to reverse direction and move towards the safer US treasury bills and bonds. Whatís more, the rise in US interest rates might also lead to increasing pressure on the RBI to raise interest rates in India.

Thus, at this moment, it is pertinent to look at both the upside and the downside with a fundamental view i.e. earnings growth and relative valuations. In the same breath, we would like to state that we remain positive on India Inc.ís long-term prospects and believe that a selective and staggered investment approach is apt for investing into equities at the current juncture. Happy investing!


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