Markets await Q2 corporate results

By Oommen A. Ninan

MUMBAI, OCT. 7. The bearish sentiment on stock markets is continuing as the current global uncertainty is unable to resolve immediately. However, there is a silver lining in this entire scenario with the Indian Government deciding to push through its disinvestment process by clearing the strategic sale of equity in CMC to Tata Consultancy Services and HTL to HFCL. But this may not necessarily reflect in the movement of indices in the coming days.

The market is optimistic that technology companies would announce better-than-expected financial results in the second quarter of this year.

``The Sensex has run into some resistance at 2825-2830 level. The correction does not appear to be over. The U.S. markets too have reached resistance areas which could lead to a decline in the U.S. as also the rest of the world next week. The Sensex too may hence continue to correct, although at a lower rate. We reckon that barring any news of fresh violence or confrontation, the 2600 low should hold out for the moment. We may see a higher bottom forming later this week between 2685 and 2715 from where the second leg of the rally towards 2950-3050 may start. We would advocate selective buying of large cap index heavyweights from a purely short-term basis, though long-term investors may continue to pick their cherries as they ripen at every fall,'' said Mr. Girish Nadkarni, Chief Executive Officer, TAIB Securities, a leading FII.

The benchmark Bombay Stock Exchange 30-share sensitive index remained flat with a marginal movement of 1.30 points at 2812.90 against 2811.60 recorded in the previous week. On the National Stock Exchange, the S&P CNX Nifty was virtually unchanged at 914.60 against the previous week's close of 914.10.

The markets seem to have regained some lost composure last week rallying modestly in the face of continuing weak economic news. According to Mr. Nadkarni, the action of various groups of stocks since September 11 is typical of a market trying to come to grips with the emerging realities which explains why index stocks, especially the heavyweights, have shown maximum swings and volumes. Market participants do not appear too keen to trade non- index stocks except where there is liquidity.

Investors with a short to medium term perspective would do well to heed technical positions of stocks and trade liquid large cap index stocks either way. ``We also advocate that investors should not have complete disregard for value stocks in the market, even if they are not part of key indices, because over a longer timeframe, the returns from these may well provide the proverbial `kickers' to the portfolios,'' said Mr. Nadkarni.

The equity markets in India have followed the global trend during the past few months and have been in the bear phase. This has been primarily driven by the fact that the global equities meltdown combined with some concerns on domestic economy and the systemic changes in the Indian markets produced a cumulative negative impact.

All this has been significantly exacerbated by the events of September 2001. ``Quite obviously the equity markets are despondent. Such markets throw up good businesses at moderate valuations as the great investors of the world have said. Thus while in the short term, the markets may not be able to find any trigger for a significant rally, the long term outlook looks more sanguine,'' felt Mr. Ved Prakash Chaturvedi, Chief Executive, Cholamandalam AMC.

In the short term, equity markets will remain hostage to global paranoia, concerns on domestic economic performance and lack of opportunities for speculators to create price discovery process. Mr. Chaturvedi said short term volatility could be used by serious long term investors to enter the markets on a bad day.

What this means is that on a day when sentiment is severely depressed and prices have relatively come down, serious long term investors should gradually invest.

It is interesting to note that how another asset management company handled the crisis situation in a bear market. About their Equity Fund and the Balanced Fund, Mr. Rajat Jain, Chief Investment Officer, IDBI-Principal Asset Management Company, said, ``We cut our positions in Infosys and Satyam Computers during September. The Equity Fund has added positions in Larsen & Toubro, Reliance, Dr. Reddy's, Ranbaxy and Pfizer. We maintain our portfolio weight in consumer goods companies." According to him, at this point, scrips of many good companies with sound management are available cheaply and this is a good opportunity to buy them. ``We hope to be adding these companies to our portfolio in the near term. Of course, not all will perform over the next few months, but having them in one's portfolio will be rewarding for the investor," Mr. Jain added.

On its Growth Fund and Tax Savings Fund, Mr. Jain said, ``We have made many changes to our portfolio in September. We are now underweight the IT services sector as we reduced our IT holdings by 50-60 per cent post-WTC attacks. Our concerns on the IT sector are more from a longer term and structural standpoint as we see risks to the concepts of globalisation in general and outsourcing from India in particular. We remain overweight the consumer sector compared with benchmark weightage.''

``Our consumer stocks exposure is more towards high growth stocks with attractive valuations. Our bet on consumer sector is based on expectations that in a possible monsoon-led economic recovery, demand for consumer goods will be positively impacted the first. We are now overweight the pharma sector as we see the generic exports thrust of top Indian pharma companies gaining ground. We see pharma stocks as good growth defensives. We continue to be underweight on industrials and domestic cyclicals, although we have added BHEL and L&T to our portfolio due to attractive valuations, as we prefer the consumer sector, at this stage, for a play on any economic recovery. We have used this period of turmoil to reduce our cash holdings significantly."

The month of September saw the market deeply affected by terrorist attacks on World Trade Centre (WTC) in New York and its implications in terms of a global war on terrorism. The market has lost 430 points or 13.3 per cent in September, ending the month at 2811, after reaching a low of 2600 during the month. The events on September 11 have clearly raised short-term uncertainties. In the short term, much depends on the nature and extent of a reaction from the U.S. and its global allies, a reaction which now seems could be much more measured than earlier thought. Risks of a global recession now seem high as the U.S. consumer demand, which was holding up, and was the one bright spot in the scenario, could weaken.

Mr. Jain said the reaction in Indian markets to these events was as much out of fear of large FII outflows as it was due to a further delay in economic recovery with the resultant impact on exports of goods and IT services besides the risk of higher crude oil prices. Indian IT services stocks have fallen 30-50 per cent since the WTC disaster. ``The much feared large FII outflows have not really happened," Mr. Jain said. Post-WTC, net FII outflows have amounted to $54 million in September, which can be considered as normal. Domestic mutual funds have, on the other hand, been buyers. Additionally, international crude oil prices have slumped on fears of a global recession and contraction in global demand for oil.

In the aftermath of the WTC, India does face risks from a geo- political perspective. However, from an economic perspective, the risks may not be large as India still has a strong domestic economy and low leverage to the U.S. and global GDP growth. Progress of monsoons has so far been quite satisfactory with the monsoon not just being normal but also well dispersed. Mr. Jain is hopeful of a second-half economic recovery, which may be a rural consumption-led recovery.

For the recovery to sustain, the Government will have to take initiatives towards infrastructure spending and continuation of reforms. FII inflows, ``We believe, will continue to be positive as India, with its domestic economy and lower leverage to the U.S. and global GDP growth, compares favourably with other emerging markets. Valuations of the broad market are attractive now, on a historical basis and even in comparison to the Asia- Pacific region."

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