Sustained buying in old economy stocks

By Oommen A. Ninan

MUMBAI, FEB. 18. Foreign institutional investors continued their buying spree in old economy stocks last week. However, there was profit booking on Friday, leading to a sharp decline of 107.67 points in the BSE-30 share sensitive index.

``On Friday the market closed at a crucial level where upper slopping trend line is situated,'' said Mr. Jignesh Shah, Strategic Analyst, ASK-Raymond James. After the market session the Reserve Bank of India announced a cut in the Bank Rate and cash reserve ratio (CRR) by fifty basis points which was not expected to happen so soon. ``This would have a positive impact on the bourses. So Monday's movement would be crucial,'' Mr. Shah added.

Mr. Shah said cement and refinery stocks are likely to see some corrections. But automobile, fertiliser and consumer durable sector counters may move up.

Since the Union Budget is round the corner volume may dry out to some extent. Stocks in information technology sector may also see some positive movement on Monday as Nasdaq is closed on Monday on account of President's Day, Mr. Shah opined. Nasdaq closed weak on Friday last on profit warning by some new economy companies.

The Bombay Stock Exchange 30-Share sensitive index (Sensex) fell by 67.01 points in a week to 4330.32 compared to the previous week's close of 4397.33.

On the last day of trading the Sensex tumbled by 107.67 points compared to the previous day's close of 4437.99.

Reliance Industries and Hindustan Lever counters cushioned the fall. The indices were testing this level for the last few weeks after the entry of FIIs in a major way.

On the National Stock Exchange (NSE) the S&P Nifty Index also fell by 22.90 points at 1381 as compared to 1403.90 points on the previous Friday.

Cement stocks remained highly volatile during mid-week and lack of interest continued in technology, media and telecom (TMT) stocks in spite of marginal and erratic buying in these counters. FII buying on Thursday resulted in a rise in the index.

However liquidation of overbought positions and profit booking led to a downslide in stock prices on Friday. Retail investors are still not seen much in the market. Only FIIs and operators remain there, expecting the entry of retail investors on a large scale.

``Strong FII buying cannot sustain for long and follow up retail buying has to emerge to sustain valuations,'' said Mr. Prateek Agrawal, Analyst, SBI Capital Markets. FIIs were strong buyers while Indian mutual funds were strong sellers.

FIIs bought securities worth more than Rs. 40 billion in January, a monthly record. However in February FIIs were sellers more than once.

FII buying has now crossed Rs. 5,400 crores since the beginning of the year. According to Mr. Agrawal FII buying was value based and across the board.

Strong FII inflows are a result of a slowing U.S. economy and the easy money policy being followed by the U.S. Federal Reserve which has improved liquidity in the U.S. But in the present rally there was a difference.

There was a portfolio shift in favour of old economy stocks. In many old economy sectors, India has a fair representation.

``Hence, we have seen strong buying in cement, fast moving consumer goods (FMCG), pharmaceuticals, engineering and steel,'' said Mr. Agrawal.

There are two different arguments on the impact of FII inflow. The heavy inflow of foreign investment is also increasing money supply sharply and is likely to remain an area of concern, Mr. Imran Contractor, Research Head of Milan Mahendra Securities. Fuelled by heavy FII inflows, the foreign exchange assets are at record levels. Also there is an increase in board money supply (M3).

However, Mr. Agrawal believes the increase in M3 has been good for valuations in the stock market. Bank credit is also showing some signs of growth. By December 15, 2000 total bank credit of scheduled commercial banks registered an increase of 20.9 per cent compared to 18.7 a year ago. The release of Rs. 4,100 crores in to the banking system is expected to result in a further growth in bank credit.

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