Institutional buying of stocks remains low

By Oommen A Ninan

MUMBAI, SEPT. 3. The stock markets may remain range-bound as institutional support is at a low level.

``The markets are in a consolidation phase now and I don't see large amount of changes in indices,'' said Mr. R. Sreesankar, Chief Investment Officer, DSP Merrill Lynch Investment Managers Ltd. He said that the net long positions are continuing at very high levels, which shows that institutional buying has come down or rather new purchases are not resulting in delivery. ``Institutions usually take delivery,'' Mr. Sreesankar said, adding, ``so the key question is whether institutional purchases are going to happen in stocks where there are huge long positions.''

The Bombay Stock Exchange (BSE) 30-Share Sensitive Index (Sensex) moved by 60.45 points to 4477.31 on the last day of trading on Thursday as compared to 4416.86 at the previous week's close. On the National Stock Exchange (NSE) the S&P Nifty Index moved up by 12.85 points at 1394.10 on Thursday compared to the previous Friday's close of 1381.25. The carry-forward (badla) charges hardened further on Saturday on the back of tight liquidity in the market. On BSE it is in the range of 15 to 16 per cent. Call rates also moved up to 13-14 last week. Speculators are building up long positions as many companies are going for book closure in September. There is a backwardation (Undha Badla) charge in HDFC.

``The market remained generally subdued since March 2000 on account of several factors, such as, the slowdown of FII investment, volatility in the foreign exchange market, uncertainty about international oil prices and the bearishness in the international stock markets especially the Nasdaq,'' Reserve Bank of India has stated in its Annual Report for 1999-2000 which was released on August 28.

Mr. Sreesankar believes that the economy will grow with a slight increase in interest rates. Liquidity is awash today. ``With enough liquidity in the system, the current increase in interest rate is not really enough to slow down the economy,'' he added. This is because the economic growth is not coming from investment led demand, but more out of consumption. Most of the sectors are going to do very well with a 6.5 per cent gross domestic product (GDP) growth. Among them fast moving consumer goods (FMCG) and pharmaceutical sectors are doing well. Mr. Sreesankar said that software companies should talk in dollar terms, not in terms of a fall in the value of rupee. ``If they talk in dollar terms it will help them to be globally competitive.'' So investors should watch out for such companies.

``The steep decline in the prices of some major infotech scrips in the recent period has raised questions regarding the sustainability of their P/E multiples at high levels in future,'' the RBI has stated in its annual report. The CNX IT Index declined sharply by 47 per cent between end-March 2000 and end July 2000.

Cement is growing almost at a double digit rate for the last 27 months. ``Building blocks have a good demand,'' said Mr. Sreesankar. Steel is also in good demand. The demand for steel in construction sector went up 11 to 12 per cent in the first quarter of this year. What about pricing? The boom of 1993 to 1996 is not going to come back. So the accent is more on cost cutting, efficiency, productivity and working capital management. ``Investors should look at such companies,'' he added.

For example, Tisco's cost for hot rolled (HR) coils production which was at $223 a tonne in 1998-99 has come down to $157 by the end of last fiscal year. At the same time the South Korean steel giant Posco's cost of production for HR coils was $154 a tonne. In the commodity sector, if a company has to be successful it has to reduce the cost.

The Reserve Bank has announced measures to inject liquidity into the capital markets. The central bank has linked banks' investments in capital market instruments such as equity shares, convertible debentures and mutual fund units with banks' total outstanding advances instead of with incremental advances. So far these were limited to 5 per cent of incremental advances. The new measure, now limited to 5 per cent of the total outstanding advances, will make available larger kitty for capital market instruments. However, this is unlikely to translate into larger investments in the capital market as banks always adopt a conservative approach to equity investments.

It is interesting to note from the Annual report of RBI that ``During 1999-2000, banks' direct investment in the capital market instruments declined sharply. Accommodation provided by the scheduled commercial banks to the commercial sector through investments in bonds, debentures, preference shares and equity shares - including loans to corporates against shares to meet promoters' contribution - declined to Rs. 11,513 crores during 1999-2000 from Rs 14,378 crore during the previous year. Banks' investment in bonds, debentures and preference shares at Rs. 11,071 crores formed the major portion of investment in capital market instruments.'' This means that the scheduled commercial banks' investment in equity shares in the last one year was only Rs 442 crores!

Banks are having money and a lot of liquidity, but the sentiment is bearish, obviously, because of many external factors.

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