Old economy stocks join the rally

By Oommen A. Ninan

MUMBAI, DEC. 10. Eventhough a slowdown of the economy looms large over the stock markets, a further short rally is considered possible. However, investors will have to remain cautious. The year-end may see the Sensex around 4500 levels and investors may book their profits at these levels.

The ``markets continue to hold out,'' said Mr. Gul Teckchandani, Chief Investment Officer of Sun F & C, a leading foreign institutional investor. The trend continues to look positive and this is a good time to buy even technology shares. Overall, Mr. Teckchandani said, the market looks as if it is going to move northwards. ``Now I believe the technology stocks offer good value while certain media stocks have fallen from their peaks. Pharmaceuticals and cement continue to look good,'' he added.

``We think the medium term outlook for the market is good,'' said Mr. Prashant Jain, Fund Manager, Zurich India. If the public sector enterprise disinvestment plan makes some progress, the sentiment for stocks could change for the better. Mr. Jain said the valuations of the technology stocks are in line with the growth rates. However, he said, Infosys is over-owned and this could be a dampener for the stock for some time. Old economy stocks are still going very cheap. Mr. Jain added, ``We think investors should maintain a diversified portfolio comprising both technology and non-technology stocks.''

``I assume a healthy market in the coming days. The breadth of the market is good and I think we are seeing a recovery underway,'' said Mr. Ramesh S. Damani, a leading broker on the Bombay Stock Exchange. According to him, there is some evidence that the uptrend is percolating to shares other than the A group. ``Smart money is buying values,'' said Mr. Damani, adding, ``by the year-end I see the Sensex rallying to 4500 level.''

The Bombay Stock Exchange (BSE) 30-Share Sensitive Index (Sensex) moved up by 124.12 points at 4156.08 from the previous week's close of 4031.96. From November 24, the Sensex has 287.74 points. On the National Stock Exchange the S&P CNX Nifty Index gained 38.90 points at 1313.80 points from the previous Friday's close of 1274.90.Last week witnessed good demand for economy related stocks as the counters of auto sector were crowded with investors on the last day of the trade. Towards the close of the trade Information Technology stocks witnessed heavy demand.

The Morgan Stanley Capital International's (MSCI) Index will be recast on Monday and its weightage on India will include free float in stocks. India is likely to be hit as many of the companies are family owned and closely held companies. MSCI India Index comprises 61 stocks. The weightage may reflect in the investment pattern of foreign institutional investors (FIIs). Many local fund managers have already factored this issue while many others barely follow the MSCI emerging markets indices.

Unlike the last rally which was led only by technology, media and telecommunication (TMT) stocks, the current uptrend in stock prices includes economy related stocks also. It may appear contradictory that when the economy is witnessing a slowdown, share prices of economy related stocks are going up. Mr. Prateek Agrawal of SBI Capital Markets has an answer; ``At current valuations, Indian commodity stocks are undervalued.'' Commodity price falls should not impact valuations because the talk going around in commodities is value addition and cost reduction. Said Mr. Agrawal, ``We expect companies like Hindalco and Tisco which are focussed on value addition and cost reduction to be able to sustain present valuations even in the face of a reduction in global prices for their products.''

Though late, it is interesting to see India's old business houses waking up to the importance of improving and enhancing shareholder value.

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