• DECEMBER 22, 2004

All time high

The Indian indices are at their all time high and what's more, they seem resolved to create new highs as the year 2004 is nearing its end. The indices have had a terrific run both in 2003 and 2004. So, what should the investor do from here on?

The heartening thing, both about the 2003 and 2004 rally, was that all sectors participated in it. This was unlike the previous bull markets, say in 2000, when it was the tech companies that really called the shots. Also, unlike other years, the bull rally has been more or less devoid of stock related scams (atleast so far). To that extent, it is clear that the rally is built on a fundamental base.

So far, so good! What now? This is question that is haunting most retail investors currently. Should you exit or should you buy more? Frankly, there is no clear-cut answer to this. The strategy should be a mix of profit taking in certain sectors, where valuations have hit the roof, and of a staggered investment in sectors that look good over the next 3 years.

As we have said earlier in this space, with companies encompassing huge capex plans in their overall strategy, there is bound to be pressure on cash flows and gearing ratios, which is likely to slowdown down earnings momentum for high capex sectors. Hopefully, the corporates have learnt the lessons from the excesses that occurred in 1997, when expansion led to excess capacity, hence lower realisations and higher debt servicing costs.

Of the NSE-50 stocks, over 50% are trading near their 52-week highs. Moreover, of the 50 stocks, 40 have gained during the year. But the worrying aspect is that penny stocks like 'Bommidala AQ', 'Shyam Software' etc., which are names most of the investor community would not even have heard, much less had some bit of research on them, have also more than doubled (or tripled in some cases).

One of the key reasons for the Indian indices shooting through the roof is the FII interest. It is very unlikely that FIIs will be looking at penny stocks. In effect, it is only logical to assume that these unheard of companies have not gained on the back of any fundamental strength, but on 'hot air' of market optimism.

Investors will thus do well to stay away from such stocks. If at all you have such stocks in your portfolio (as a result of some previous rally), it is a good time to exit. When markets are at their all time high, stock selection becomes difficult. Prudence and research (whether on your own or through a service provider) are likely to help you in taking the right decision.

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