Old economy stocks back in favour

By Oommen A. Ninan

MUMBAI, MAY 28. Some hopes are penetrating into the stock markets as selling by foreign institutional investors had slowed down substantially with the emergence of fresh buying from domestic institutions and operators. However, the indices will be range bound as the markets are in a major corrective phase. This time the winner is likely to be old economy stocks.

``It looks like the market is near the bottom except for the regional realignment of portfolios arising out of the recomposition of Morgan Stanley Composite Index (MSCI). One more factor is that the leading information technology stocks are under selling pressure with weak investors looking to book profits. ``However, the market seems to be flattening out and one looks to the Government to provide policy initiatives which will trigger the market into a recovery,'' said Mr. Sunil Shah, a leading broker on the Bombay Stock Exchange.

The benchmark Bombay Stock Exchange (BSE) 30-share Sensitive Index closed for the week at 4084.71 compared to the previous week's close of 4068.65. While information technology stocks kept the bourses under pressure early last week, the later recovery was led by fast moving consumer goods (FMCG) and cement stocks. The week-end purchases of FIIs cheered the market especially their investment of Rs. 342 crores last Wednesday. Domestic institutions and operators also made fresh purchases of old economy stocks.

For FIIs and domestic institutions, there might be a shift in focus from the new economy stocks to old economy stocks. However, select technology stocks are expected to perform as their profitability remains intact. Among old economy stocks, which led a marginal recovery on bourses last Friday, Hindustan Lever deserves special mention. The counter hit the upper circuit limit of 12 per cent on fresh buying interest ahead of its stock split. HLL counter witnessed crowding of domestic institutions including mutual funds as well as FIIs. Compared to the previous closing of Rs. 2,237.65, HLL closed on Friday at Rs. 2,506.15.

A recent publication of Birla Mutual Fund is giving an interesting view about the decline in Sensex. It stated, ``the decline was on thin volumes indicating general disinterest in the markets. Overnight over-optimism turned into unwarranted pessimism. These gyrations confirm the fickle nature of the market. The following broad observations could be made from these market movements: (a) fundamental investing made way for momentum investing (b) market excesses on either side tend to change on minor triggers and (c) these corrections do not afford enough time for realisation, leave aside action. One should realise that the stock market is means to an end and not the end in itself. It is only disciplined fundamental investing which has yielded the desired results.''

It seems Indian markets are started to ignore the U.S. markets. The U.S. markets lost ground on last Thursday after a smart recovery last Wednesday. While the old economy stock dominated, Dow Jones was down 211.43 points to settle at 10,323.9 and further down on Friday at 10299.2, the tech-heavy Nasdaq Composite Index was down on Thursday by 65.26 points to settle at 3205.4 and remained almost that level on Friday at 3205.1. However, the Indian securities listed on US market reported a mixed trend.

Although a decision on Air India privatisation has been taken by the Government, the investors are not enthused to believe that the privatisation or disinvestment of other public sector enterprises (PSEs) are in the immediate agenda of the Government. Mr. Shah admitted that it is a positive decision from the Government ``but must get implemented to be credible.'' Also there are hundreds of other PSEs which requires similar and bolder initiatives. The Government decided to disinvest upto 60 per cent equity of Air India. This would include sale of 40 per cent shareholding to a strategic partner which could comprise a foreign entity or even a foreign airline upto 26 per cent. While 10 per cent of Air India's equity stake will be offered to employees in the form of employees' stock options (ESOP), balance ten per cent will be available for sale to domestic financial institutions and investors.

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