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Thursday, March 20, 2008

Is it time to invest in indian markets ?

The Indian stockmarket, along with the world markets, are currently facing challenging times. Worsening subprime crisis, slumping dollar, rising commodity prices especially crude and food and the slowdown of the US economy has led the indices to shed considerable losses and revert to the levels seen last year.

In this article, we shall take a look at how some of the sectoral indices have performed in the last three months.

Company Price on Jan 18,2008 (Rs) Price on Mar18,2008 (Rs) Change
BSE Sensex 19,014 14,995 -21.1%
BSE Bankex 11,372 7,495 -34.1%
BSE Capital 18,334 13,095 -28.6%
BSE Auto 5,148 4,398 -14.6%
BSE IT 3,791 3,370 -11.1%
BSE Healthcare 4,025 3,671 -8.8%
BSE FMCG 2,303 2,142 -7.0%

As seen from the table, the Sensex is down 22% with the BSE Bankex being the worst performer, and BSE FMCG index registering the least losses.

Banking: The ongoing credit crises have impacted the banking sector across the world. The collapse of the subprime mortgage market wiped out almost US$ 100 bn of value from the three biggest US banks in the past six months.

In India, though the banks do not have direct exposure to subprime, they have overseas exposure in credit derivative products through companies and therefore have to bear the brunt of mark to market losses.

ICICI Bank has reported marked-to-market losses of US$ 264 m in its overseas operations on account of its exposure to credit derivatives and investments at the end of January 2008. Even SBI and Bank Of Baroda have some exposure and the stocks have plunged 30% and 45% respectively since Jan 2008. The Rs 600 bn debt relief package announced in the budget was also instrumental in adding fuel to the fire.

Capital goods: There was significant heating up in the sector, leading to overvaluation of stocks in the past one year. Hence, any correction was imminent.

However, with the global liquidity crunch, corporates would find it difficult to raise capital for their execution plans, thereby affecting their performance.

Further, even the recent IIP numbers (2.1% in Apr 07-Jan 08 as against 16.3% in the corresponding period last year) led to the negative sentiments for the sector.

Auto: The sector, whose contribution to employment is among the highest, has not had a good run on the bourses. This can be attributed to the fact that the companies from the sector are facing pressure both on the costs as well as revenues front. The only exception could be passenger cars where volumes have seen a positive growth rate.

However, in the case of two-wheelers and CVs, higher interest rates and lack of adequate credit have meant that buyers have stayed away. Furthermore, spiraling prices of commodities have also impacted cost structures in a big way.

We believe that the sectoral index will have to put up with some more agony in the near term as there seems to be no relief on the horizon either in the form of lower interest rates or softening of commodity prices. The excise duty cuts recommended in the latest budget are also not having the desired impact.

Software: Even before the chaos had started in the Indian markets, the software sector was the worst hit on account of the appreciating rupee. And even now it continues to face pressure. The reason for the same can be attributed to the impending slowdown of the US economy.

The BFS (Banking and Financial Services) sector is the largest spender in IT in the US. With the ongoing credit crisis in the US, the spending on the BFS front is likely to reduce. Also, with the expected slowdown in the US, Indian IT companies have downgraded their volume growth for the coming quarters. Though the rupee has stabilized against the dollar in recent times, the overall scenario looks bleak.

Pharma and FMCG: Both the sectors are of defensive nature. This is because even in times of recession, people would continue to use daily products and medicines. With increasing income, growing consumerism and health awareness, the growth of these two sectors is expected to be robust. Also, given that the budget has been beneficial to these sectors, the outlook looks positive.

Summing it up…
Equities are a risky asset class. The last three months have indicated how volatile stock markets can be. However, as history has shown, while sentiments affect performance over a short period of time, in the long term, it is the fundamentals, which finally gets it going.

Hence, the weakness in the stockmarkets at present should be looked upon as an opportunity to invest in good quality stocks with strong fundamentals, sound managements and reasonable valuations from a long-term perspective.

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