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What's worrying capital goods stocks?
Mon, 6 Sep Pre-Open

After a dull previous week, the Indian markets closed last week amidst gains. However, the Sensex remained as the worst performer among key global indices. A large part of the slackness in India was due to pressure on stocks from the oil & gas and capital goods sectors. These stocks have in fact been under some pressure off late. This is given that their respective indices - BSE-Oil & Gas and BSE-Capital Goods - have underperformed the broader Sensex in recent times.

Asian stocks too saw some action this week as Singapore, China and Japan reported weekly gains in the range of 1% to 2%. India's benchmark index, the BSE-Sensex was however, the top underperformer this week, with gains of only 1.2%.

Source: BSE

Let's talk about capital goods sector here. Stocks from this sector were among the worst sufferers in the financial and economic crisis of 2008. And then these were among the front-runners in the bull-run that started in March last year. One of the biggest reasons for their downfall and then the recovery was the availability of finance for industrial companies. A shortage of money for industrial capex in 2008 negatively impacted the capital goods stocks. And then the flush of cheap global liquidity that started in March 2009, and that brought the much needed cash for industrial expansion, capital goods companies rode the wave.

As we stand now, while the industrial growth remains positive, it is showing signs of a slowdown. As per the June figures release in August, growth in India's industrial production slipped to a 13-month low as the effects of government stimulus waned and expansion returned to more normal levels. Industrial growth during that month slowed down to 7.1% YoY, after eight months of double-digit expansion. The impact of this slowdown has been seen on the stocks of capital goods companies off late.

Considering the global uncertainty and caution regarding the RBI's interest rate stance, the capital goods sector's fortunes remain under a cloud of uncertainty. As far as the broader markets are concerned, we see high valuations weighing heavy on stock prices.

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