 |
"The focus has suddenly shifted
back to large caps and even new investors are chasing safe-haven
frontline stocks. That's the problem we are facing today"
Hemendra Kothari, Chairman, DSP Merrill Lynch |
In may
2006, some of the country's key economic indicators looked like
this: The trade deficit, which is the difference between exports
and imports (with the latter being higher than the former), stood
at $3.8 billion or Rs 16,720 crore; the prime lending rate (PLR)
of commercial banks stood at 10.8 per cent; 10-year government securities
(G-Secs) were yielding 7.6 per cent; and inflation hovered around
6.1 per cent. Cut to February 2007:
The balance of trade is now negative to the tune of $5.8 billion
or Rs 25,520 crore; borrowers of all hues (retail as well as medium-sized
enterprises) are coughing up more what with the PLR climbing to
12.3 per cent; safe-haven assets like fixed deposits and bonds
are back in fashion as 10-year government paper breaches the 8
per cent mark; and, last but not least, the monthly budget of
households has shrunk with inflation peaking at 6.7 per cent.
If the scenario on the economic front was steadily
deteriorating in the nine months between May and February, it
wasn't quite reflected on Dalal Street. In fact, the euphoria
persisted. After hitting a new high on May 10, 2006, of 12,612
points, the Bombay Stock Exchange's (BSE's) benchmark index did
brutally correct over 26 trading days by 29.20 per cent to hit
a low of 8,929 points thanks to fears of a global commodity bubble
that looked set to implode. However, after duly riding out that
crisis, the Sensex rebounded in style, and came within striking
distance of the 15,000 mark in early February, hitting 14,697
by the 8th of that month. That the markets have since corrected
is another story (attributable to global factors), but the 2,000-odd
point spurt in just 180 trading days made you wonder whether punters
had taken into account the dark clouds in the macroeconomic picture.
It would appear, from the Sensex's spurt-and the pundits' consequent
predictions that stretched from 20k to 50k over varying time-spans-that
market men were blinded to these worries.
They weren't.
 |
"There has been a slowdown in
FII inflows, but the shortfall, more or less, has been made
up by higher FDI"
Sushil Muhnot, Managing Director, IDBI Capital markets |
For a
moment try and look beyond the much-hyped Sensex (and indeed other
similar benchmark indices), and consider instead the 30 stocks that
give it life. Therein hangs a bearish tale: Just six stocks with
a collective weightage of 40 per cent have contributed to the rally.
The rest didn't participate at all in the run up to 14,600 levels.
In fact, 14 of the Sensex shares have been value destroyers in the
May-February period, by as much as 30-54 per cent in a few cases.
Look beyond the Sensex and the picture isn't brighter, with the
BSE's 286-stock mid-cap and 463-stock small cap indices flat as
a pancake. And sectors that were till recently the rage-auto, fast-moving
consumer goods, public sector undertakings, metals and pharma-are
in various states of neglect (see Does the Sensex Make Sense?).
Last fortnight, as markets globally slipped into a free fall, unsurprisingly,
back home, the stocks that fell the hardest were those that had
fuelled the index's heady rise. For instance, HDFC, HDFC Bank, Reliance
Communications, and ICICI Bank were responsible for pushing down
the Sensex from the 14,600 levels to 12,500 by March 15.
Meanwhile, bearing the brunt of the apathy to India
equity (or at least to most of it) are mutual fund schemes that
tapped the markets in 2006 (see No Fun for Funds). Almost all
of them have registered negative returns since inception. The
net asset value-based returns of DSP Merrill Lynch Mid-cap and
Small Cap Fund, for instance, are down by 14 per cent since launch
in October, even as the Sensex has moved up by 5 per cent since
then. UTI Contra Fund is down 13.14 per cent since being flagged
off last March.
 |
"Mid-caps are tomorrow's large
caps. I'm not unduly worried"
Nimesh Kampani, Chairman, JM Financial |
The big question being asked on Dalal
Street these days is: Is the four-year structural/secular/broad-based
rally over? Clearly, signs of fatigue have begun to show in the
past nine months, and the multi-bagging machine that the Indian
market till recently was, is beginning to sputter. "The focus
has suddenly shifted back to large caps and even new investors are
chasing the frontline stocks. That's the problem we are facing today,"
explains Hemendra Kothari, Chairman, DSP Merrill Lynch. Adds Asit
Koticha, Managing Director, ask Raymond James: "The broader
market's behaviour can be attributed to an underperformance in relation
to expectations rather than any actual financial (under)performance."
A worry is the decline in delivery-based trades, down to 32 per
cent, which is the lowest level in years, and which clearly points
to the lack of conviction in the long term. This is also reflected
in the advance-decline ratio which has been below one for six out
of nine months since May (which means there have more stocks falling
than rising in these months) for the 1,000 most actively-traded
stocks on the National Stock Exchange.
Some sections of the market can't understand why mid-caps are
getting the cold shoulder. Earnings growth for this sector is
robust (for the December ended quarter, mid-caps showed a 38 per
cent growth in profits). And, as Nimesh Kampani, Chairman, JM
Financial, puts it: "Mid-caps are tomorrow's large caps.
I am not unduly worried."
 |
"India's growth story is compelling.
I don't think Malaysia, Philippines and Vietnam markets are
big enough to force foreign investors to shift money from
India"
Andrew Holland, Managing Director, DSP Merrill Lynch |
The ubiquitous foreign institutional investor
(FII), and the flows this tribe brings into the country, will have
a major hand to play in creating tomorrow's mega caps. After all,
it's been largely FII funds-all of $34 billion or Rs 1,49,600 crore
in the past four years-that have been instrumental in pulling up
the Indian markets from the undervalued stage to one of fair valuation
(some would argue to a stage of overvaluation). However, the bad
news is that FII inflows are showing distinct signs of flagging.
In the last 10 months since May, net inflows have plunged by close
to 60 per cent, to Rs 19,408 crore from Rs 46,445 crore in the previous
corresponding period. In fact, the last 10 months' inflows are the
lowest since 2003. Sushil Muhnot, Managing Director, IDBI Capital
Markets, says: "There has been a slowdown in FII inflows, but
that has, more or less, been made up by higher FDI (foreign direct
investment)." That's cold comfort for investors who've bought
shares hoping that foreign money will fuel those shares to dizzier
heights. One reason for the subdued FII interest may be that the
options for investment for global investors are simply narrowing
down. For instance, in a sector like banking, FIIs have reached
their respective permissible limits in stocks like ICICI Bank, State
Bank of India, Bank of Baroda, Oriental Bank of Commerce, Punjab
National Bank and half-a-dozen other state-owned banks. Amongst
the Sensex stocks, ICICI Bank and Bharti Tele are two stocks with
a total weightage of 17 per cent where the FII limit has been reached.
But fewer options may not be the
only reason for the dipping FII inflows. It could just be that
the Indian markets have run out of steam in the past 10 months,
and other emerging markets-particularly in the Asia-Pacific region-
have begun to look more attractive. For instance, the Chinese
markets had gained 90 per cent since May 10 till last fortnight;
the Sensex on the other hand had inched up by only 3.10 per cent
in this period. Yet, there are those who believe that few emerging
markets can boast of a story like that of India over the longer
term. Andrew Holland, Managing Director, DSP Merrill Lynch, says:
"India's growth story is compelling. I don't think the Malaysian,
Philippines and Vietnamese markets are big enough to force foreign
investors to shift money from India." But the billion-dollar
question is whether, barring the elite bellwether stocks, the
FIIs have enough conviction in the rest of the pack that's listed
on the Indian stock exchanges.
|
