• DECEMBER 31, 2004

Stock markets: It's shining!

The calendar year 2004 was a real roller coaster for the Indian indices. The year started off with the Sensex touching the all time high of 6,250, only to slide to 4,300 levels in mid May. The markets saw the largest single day loss (565 points) in its history during this period. At that time, all the optimism faded into oblivion and doom stories sprang up thick and fast. The 6,500, 7,000+ levels for 2004 end that were mouthed by most investment managers seemed ages away. However, the indices made one of the finest comebacks in its history and in that sense made 2004 a landmark year in the history of Indian equity markets.

What was different in 2004 as compared to 2003?
Democracy in function: Besides the sharp rise in crude prices in the global markets, inflationary pressure in light of firm commodity prices, the strengthening of interest rate across major economies and dollar depreciation, the key highlight of this calendar year was that the Indian economy had a change in leadership. Until April 12th 2004, most investors and the general public were of the view that the previous government i.e. the NDA would come back to power by a fair margin. But as the elections results unfolded in May 2004, a surprise was in the offing. While it was clear that BJP will not be back in power, everyone wished that the 'Left' be 'left out' of power. But the Congress joined hands with the Left and Dr. Manmohan Singh took the oath as the new Prime Minister. What is to be appreciated here is the fact that we as a country were able to absorb this transition quite easily. To us, this was the strongest sign that the fundamental driving force of our constitution i.e. democracy, is alive and kicking. While the stock markets may have shrugged off the fact that the transition has happened smoothly, it is a significant milestone for the Indian economy. Moreover, despite apprehensions, the new government has carried forward the reform process, atleast for now.

IPOs line up: In the first quarter of the calendar year, in an effort to meet its disinvestment target in a hurry, the then government announced a slew of 'offer for sale' (IPCL, IBP, CMC, GAIL and ONGC). While pricing of the offers was an issue (as investors had the option to buy from the spot market and therefore, the government had to offer at a lower price to retail investors to garner money), concerns also emanated in the stock market circles with respect the impact of a slew of IPOs on the spot market (i.e. investors would sell in the spot to participate in the IPO). This was also one of the reasons why there was volatility in the first quarter of the calender year.

Disinvestment blues: Then came May 17th. On the back of comments by the left with respect the disinvestment of PSUs, the markets witnessed the steepest fall ever in one single day. While 'value buying' resulted in the markets recovering from the day's lows, investor confidence was shaken. Here again, despite one of the biggest crashes in the country, the stock market was not faced with a payment crisis like in the past, which underlined the fact that the country's financial system is on a strong footing. Again, the stock market failed to acknowledge this duly and the resilience was left understated. But the Finance Minister's decision to hike FDI limit in sectors like aviation, insurance and telecom in the Budget came as an assurance to investors and since then, the stock markets have been on an upward bias.

The outperformer of the year: The Bankex
The graph above shows what Rs 100 invested at the close of December 26th 2003 in various sector indices would have yielded in the last one year. As is evident, the Bankex has outperformed with the BSE Infotech index also gaining ground. The outperformance of the IT index in 2004 is in total contrast to 2003 when both the IT and the FMCG index underperformed the BSE Sensex. Though the Bankex has outperformed, it has to be borne in mind that this has come about only in the last four months. Till the first half, bank stocks came under significant selling pressure owing to the strengthening of interest rates and its consequent impact on the other income. Read our outlook on the banking sector.

BSE 'A' group - Top 10 gainers
(Rs)26-Dec-0327-Dec-04% change52-week H/L (Rs)
Sensex 5,699 6,513 14.3%6,567 / 4,228
S&P CNX Nifty 1,837 2,063 12.3%2,079 / 1,292
Chennai Petro 90 226 151.4%261 / 72
Indian Overseas Bank 35 74 111.2%77 / 33
Union Bank 51 107 110.6%115 / 43
HCL Infosys 384 800 108.4%815 / 381
Aventis Pharma 682 1,370 100.9%1,400 / 625
Bharti Tele 106 208 96.0%220 / 104
Adani Export 41 80 95.8%86 / 31
Federal Bank 84 160 89.5%164 / 72
Arvind Mills 66 125 89.1%128 / 41
IDBI 57 108 88.3%113 / 29

The laggard of the year: BSE FMCG
The highlight of the year, as far as the FMCG sector is concerned, was the price war that was kicked off by P&G. This then led to a drastic decline in operating margins of FMCG majors. Though the FMCG index has underperformed, there are smaller-niche players who clocked good gains during the year. Read our view on the FMCG sector going forward.

BSE 'A' group - Top 10 losers
(Rs)26-Dec-0327-Dec-04% change52-week H/L (Rs)
Sensex 5,699 6,513 14.3%6,567 / 4,228
S&P CNX Nifty 1,837 2,063 12.3%2,079 / 1,292
Visualsoft(I) 258 127 -50.8%275 / 109
Dr.Reddy 1,423 855 -39.9%1,470 / 653
D-Link India 196 121 -38.2%235 / 101
MIRC 41 27 -33.6%44 / 18
NIIT 266 178 -33.2%283 / 110
Tamilnadu News Print 97 65 -32.2%104 / 41
Polaris Software 240 163 -32.2%277 / 114
Rolta India 115 80 -30.5%126 / 55
Nirma 500 349 -30.1%520 / 251
HLL 203 145 -28.6%218 / 104

What to expect?
  1. FIIs and the India story: It is no news that FII inflow into the country has touched yet another high. While much has ben debated about what is driving this money flow into the country, it is important for investors to understand that the rationale for an FII to invest in India is based on relative attractiveness to other emerging markets and more importantly, the risk-return trade off. If interest rates in the US were to increase significantly next year (which is expected), the FII inflow could reduce. It is known that FIIs have been the major drivers of the stock markets. And if this tap is tightened, markets could come under pressure. While we firmly believe that the Indian economy is on a very strong footing now as compared to five years back, just banking on the FII flow to remain strong is fraught with risks. It is ultimately fundamentals i.e. earnings growth that matters and the FIIs will chase fundamentals.

  2. Capex cycle: According to CMIE data, in the last five years, the growth in gross fixed assets of the manufacturing sector (till FY03) is estimated at 2% as compared to a sales growth of 17% in the same period. This means that corporates were focusing on 'sweating' their existing assets and thus improving productivity. But we believe that the investment cycle is in the offing over the next three years, which is a positive for the economy and the stock markets. Perhaps, this is the strongest reason to invest in equities from a three year perspective.

  3. But valuations matter: While much has been talked about the demographics of the Indian economy, abysmal per capita consumption level across various products and the long-term growth prospects of the economy, we believe that the Indian stock markets are not really a 'value play' from a medium-term perspective. At the current level, investors need to have longer term horizon (3 to 5 years) while investing in Indian equities. An investment with a one year (or less) horizon is fraught with high risks. Secondly, it is better to stagger your investments at these index levels.

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