Should you go stock by stock? Or look at sectors? Things may not look as rosy as they did last year, but an ounce of prudence could still see you emerging on top of the volatile bourses.

By Roshni Jayakar

In his bustling office in downtown Mumbai, Ajit Surana, a Bombay Stock Exchange (BSE) stockbroker, scans his computer screen to survey the wreckage of the four-week slide on Dalal Street. April has been a most cruel month for the stockmarket, with the Sensex plummeting 395 points (or 8 per cent) over the month. But Surana, 39, whose firm, Dimensional Research advises high net-worth individuals, is one of those die-hard optimists.

On bourses they are the stubborn bulls who never give up. Instead of getting dejected by the maelstrom in the market, Surana works the phones, telling clients to buy more. On his buy list are sectors like technology, refineries, and auto. This is something Surana hasn't really done in the last six months, when his advice to clients was more focused, recommending New Economy stocks rather than the sectors he's willing to put his money on today.

Of course, Surana's isn't the majority view. In fact, the majority is a more sceptical lot. ''This isn't the time to make a major commitment to stocks,'' says a gloomy Samir Dholakia, 38, Director, Balance Equity Broking. ''I wouldn't get bullish till the leading operator in K-10 stocks brings down his leveraged positions.'' K-10? You wonder what the man is talking about. Then he explains. K-10, for the uninitiated, are the stocks in which the New Bull on Dalal Street, Ketan Parekh, an inveterate speculator, has built up long positions.

Dholakia warns clients not to follow the herd and get into stocks prone to speculation. And he's learnt that the hard way. A customer who had bought 1,500 shares of Himachal Futuristic Communications Ltd (HFCL) and 1,000 shares of Global Telesystems, well after the markets had melted, to average out his Rs 40 lakh losses, ended up with a further loss of Rs 12 lakh. Both HFCL and Global Telesystems are perceived to be K-10 stocks, which have slid further in recent weeks. Unlike Surana, Dholakia is advising his clients to hold their horses.

So what should your stockmarket strategy be for 2000-01? Should you go by Dholakia's gloom or Surana's bullishness? Neither. Somewhere between the two views is what will happen to stocks this year. Don't expect a runaway bull market or a big slide. Most market pundits expect to see average gains of between 20-25 per cent this year. Says BSE stockbroker Manoj Murarka, 38: ''I see a certain amount of stability of the Sensex at 4,109.'' Does he see it bouncing back to 5,500? Not immediately, but perhaps over a 12-18 month period. HSBC Securities, however, sees the Sensex touching 6,000 by December, 2000. Adds Vasudev Joshi, 36, Head Of Research, HSBC Securities: ''Yields on equities, as measured by the deviation of the Sensex from the 200-day moving average and equity yield gap, which is the difference between one year prospective price earning ratio and the 364-day treasury bill, has started looking attractive.''

But there is no unbridled optimism. The bear market has cost the Sensex 33 per cent of its peak value of 6,151 in just three months. Says Deepak Mohoni, 44, investment advisor: ''The first signs of a new bull market would be major uptrends in an increasing number of stocks. There has been no indication of this as yet.''

For pointers, look to the Foreign Institutional Investors (FIIs), who have so far poured Rs 7,315 crore ($1.6 billion) into the markets during the last four months. Emerging markets' FII flows will be lower to the extent of the increase in weightage to Malaysia, China, and Taiwan in the Morgan Stanley Capital Index, though overall the FII flow could be higher as a lot of international money is looking at India for the first time.

What about the macroeconomic factors? A GDP growth of 6 per cent and an inflation rate of around 6 per cent aren't hot enough to send stock prices through the roof. Yet, with analysts forecasting a 20-25 per cent increase in corporate earnings in the first quarter of 2000-01 the market could perk up.

Go short-term, not long

For ages, individual investors have had the same advice doled out to them: never go into the market for short-term gains; always look for long-term investments. Well, that shibboleth is being stood upon its head. High volatility of the Indian stockmarket has been very unkind to long-term investors and it may be time to review that approach. Says Shankar Sharma, 38, Director, First Global: ''Investment horizons now on have to get shorter and shorter. I don't see many investments out there that can justify a 10-year holding period.''

So what does one do? Suggests Sharma: ''Change your investment style to be weighted more towards momentum than any other factor. And watch out like a hawk for flagging momentum.'' What that means is a constant churning of your stock portfolio with shorter holding periods. That is buying shares that are moving up or buying for growth.

But like economists, stock pundits never seem to agree with each other. J. Mark Mobius, 61, Managing Director, Templeton Emerging Markets Fund and an acknowledged guru of the emerging markets, disagrees: ''We look at a five-year view. If we can purchase a stock that can achieve five times the current price to earnings (PE) multiple within five years then we will buy it even if the current PE is very high. But for a stock currently quoting at PE 150 times to achieve five times that PE in five year, the growth rate has to be astounding. This is possible but not probable for most companies.''

If you want to be a savvy investor who wants to make money this year, what should your strategy be? First, remember that things aren't as easy as they were last year, when the sharp focus was on a handful of hot sectors. If you picked infotech, media or communications, things just couldn't go wrong. But the recent bashing that last year's favourite sectors have taken has put paid to that. This year, you have to be more careful.

Go by stocks, not sectors

Here's how. Instead of looking at sectors and hoping to ride the market by picking hot stocks within them, you must be micro-focused and go stock by stock to build a winning portfolio. Says Amit Rathi, 26, Director, Anand Rathi Securities: ''Secular growth is thing of the past; we are now back in the 1998 kind of scenario.'' Then, only a few sectors like transnational pharma and FMCG were moving up.

So how do you pick your portfolio? One way is to follow the ''barbell approach'' to sector allocation. The principle behind a barbell is that it should balance and that's the basic idea behind the ''barbell approach''. Advises Ridham Desai, 31, Strategist, J.M. Morgan Stanley Securities: ''Balance investments in the technology sector, which will remain volatile, with the cyclicals, where growth rates are predictable, using traditional valuation models.'' In technology, the earnings momentum is strong and valuations have turned relatively attractive, while for cyclicals, analysts are raising earnings estimates and may be in fact, trailing actual performance that these companies may deliver.

What about the two other hot sectors of the last 18 months-FMCG and pharma? Our advice is to exercise caution. Wait for an opportune time to have small portions of these in your portfolio. Like infotech stocks, the valuations of FMCG shares too have come down and turned attractive relative to what they were, say 18 months ago, but when analysts are lowering earnings estimates, stocks do not do well.

After sector allocation, a bottom-up approach to stock picking is usually a winner. This is all about investing stock by stock, looking at fundamentals and not the broader sector performance. Says Bharat Shah, 38, CIO, Birla Sunlife Asset Management: ''Investors are now on a flight to quality and solid, well-managed companies with a future will be the winners. This may be a rough rise, but in many ways this is an ideal market for fundamentalist bottom-up stock-pickers.''

Not only is infotech the largest sector in terms of market capitalisation, but it also has the highest weight in the indices. In the Sensex, for instance, infotech and media stocks have a 49 per cent weightage and in the National Stock Exchange's Nifty 50, they have a 28.5 per cent weightage. These are the stocks that are widely expected to deliver significant double-digit returns. Says Sundip Bhatia 30, Head Of Research, UBS Warburg: ''If you look at any investor portfolio, the old economy has shrunk as a proportion of everyone's portfolio and it will continue to remain at those levels despite the fall, until we see a plateauing of the growth rates in the infotech sector.'' And the numbers don't point to plateauing growth at least for another two years. Infosys, for instance, has posted record profits that are up 115 per cent over last year.

So doesn't it mean this is the right time to pick up infotech stocks? Hang on, before you rush in. Says Templeton's Mobius: ''We feel that the future of infotech companies is great. However, that does not mean we should rush into purchasing stocks which are overvalued.'' Even post-corrections in April, a number of infotech stocks are trading at high PE to earnings. It's not possible to expect companies to grow at the pace that they have grown, given the fact that when they were small rapid growth was easy.

Go for the big fish

If you had put your money in small- and mid-cap stocks last year, you must be cursing yourself because of the bloodbath these categories have seen. Of the 8,000 odd stocks listed, 1,061 stocks of the 1,530 traded fell on April 17, the day the bourses went into a tailspin following the black Friday on the NASDAQ. Liquidity in most of these stocks is low. And low liquidity makes exiting a problem. The thumb rule: it's better to stick with the leaders in the industry this year. Says UBS Warburg's Bhatia: ''Like there is a shelf space problem in a supermarket, there is also a shelf-space problem in the stock market. As long as top stocks deliver superior growth, its better to live with them, since they are always more liquid.''

Sticking with leaders has advantages. Even if some sectors are not favourites, the leaders in them can often be good investment opportunities. For instance, although the consumer-goods sector is not in favour currently, the leader in the sector, Hindustan Lever, has always outperformed. But one exception is infotech, where even the small players are dependent on exports and, hence, are hedged from the vagaries of the domestic market. Says Dhiraj Agarwal, 31, CEO, Sharekhan.com: ''There is hope for good quality software stocks to deliver. Ninety small infotech companies trying to get a free ride on the back of a few good infotech stocks will be a thing of the past.'' So punting on quality stocks at prices that are extremely attractive is a good bet.

Go for the hidden value

Among the non-infotech and communication stocks there are quite a few going cheap. Yet a number of them are focusing on shareholder value creation. At the margin, these may be in industries which are cyclical in nature but because of their focus on consolidating marketshares or getting rid of assets that are not generating enough returns or revamping existing businesses, they will be able to generate stock returns irrespective of which way their business cycle moves. Says J.M. Morgan Stanley Securities' Desai: ''Companies that have undergone massive restructuring may show a lot of surprises in earnings.''

Next, look for hidden value. Recommends Parag Parekh, 46, Director, Parag Parikh Financial Advisory Services: ''The high intrinsic worth of a company consists of the hidden value in terms of investments in its subsidiaries, joint ventures and group companies, besides normal earnings growth.'' In some of these cases, a sale might never happen, but the value of the investments is reflected in the value of the company. To take a sampling: Siemens, which holds 74 per cent stake in Siemens Information Systems Ltd (SISL) and has a revenue of Rs 140 crore with earnings of more than Rs 20 crore. According to the current valuation for software companies, this subsidiary could be valued at Rs 680 crore. Incorporating the 74 per cent valuation in Siemens, the Siemens shareholder will get Rs 140 per share worth of SISL. The Siemens stock is currently available in the market at Rs 301. The recent valuation of Tata Consultancy Services at $70 billion has a similar rub-off effect on Tata Group companies that hold stakes in it.

Or, take BSEs Telecom, an Internet-focused subsidiary of Mumbai-based power utility company BSEs. As the current valuation for most power utilities is low, at about 3 to 7 times earnings, the valuation for BSEs at 16 times may appear high. But then, banking on the existing infrastructure of power business, BSEs is able to reduce its investment and operating costs for the Net business. This should improve the valuation of the total business currently valued at Rs 3,600 crore by about Rs 400 to Rs 600 crore. Consider another example: Sundaram Clayton. Its current market capitalisation of Rs 500 crore on its own earnings potential is not reflecting true values. Its investments, mainly in group companies like TVS Electronics and TVS Suzuki, are currently valued at Rs 300 crore. With this valuation incorporated, Sundaram Clayton has potential for appreciation.

In a sense, some of the Old Economy stocks are incorporating the New Economy. Says Ved Prakash Chaturvedi, 45, Chief Executive, Cholamandalam Cazenove AMC: ''Five years from now we will not be talking of old and new. Companies that have adapted to the emerging paradigm will survive, while others will not. Thus, the old economy stocks that are vigorously adapting to a new economy paradigm are the ones that will create value for the investors.'' To illustrate: consider an automobile company. Five years from now a car may resemble a cockpit of an aircraft with geographical positioning systems and streaming multimedia content available while driving. Automobile companies that are adapting to this and obtaining necessary expertise will survive, while others will get marginalised.

Whether investors use restructuring or some other benchmark to identify opportunities, the message remains the same: if you choose your stocks carefully, you will have little to fear in a sometimes rocky, bearish-bull market. At times, you are prone to feel frustrated, but at the end of the year, you could still come up trumps. So get out your trading gear and home in on Dalal Street. Happy stockpicking!

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