The Weely Probity Report (May 10-15.1999) - Economy & Market Mood.
Sectoral view
......In a nutshell, the theory was that investment fatigue had set in the FPS trio (Consumer non-durables,Pharmaceuticals and Software), ie investors were sick and tired of listening to the same old story of secular growth, minimal impact of economic recession, brands, globally competitive, etc etc. “Give new” became the motto.
Value investing is back. The new themes are now overweigh commodities, look for attractive valuations etc. This has been borne out by the IIL sectoral indices last week.
Top gainers were petrochemicals, power and conglomerates. Both IT and
pharma declined by 1.2% and 1.3% respectively. FMCG index gained only
because of HLL. The story for next week will be oil, power, petrochemicals.
IT index will start performing after a month, when Q1 results start pouring in. Does that mean one should switch from IT to commodities? The answer is dependent on your risk profile and speed. If one is a nimble trader and can back and forth rapidly, he is advised to switch out, or else should hold on for longer term gains.
Early signs of an economic recovery?
The issue uppermost on every investor's mind is whether or not we are seeing an economic recovery. The sharp rally in the markets has further muddled the issue. As we have seen in the past, market recovery generally precedes an economic recovery. And we have also seen lots of false starts.
So, what is it this time?
Technically speaking, the current rally has been liquidity driven, but we are getting signs of an economic recovery on the horizon. Firstly, diesel consumption has increased, in the last 2 months. In February and March 1999, consumption growth has been 11.2% and 10.1% on a yoy basis, against a decline of 6.1% and 5.9% on a yoy basis in 1998. Incidentally, for the full year 1999, diesel consumption has grown at 3.8% only. Diesel, is a key energy indicator in the Indian context, and growing demand might indicate a pick up in end user segments.
Cement production and dispatches have continued the uptrend in April 1999. According to CMA, production in Apr-99 was 8.11 mn ton (up 29%) and so were dispatches at 6.27 mn ton (up 26%). This is attributed to pick up in pre monsoon activity, especially in Western India.
Agricultural growth (+4-5%) has been good. This will mean that rural demand pick up will be a key driver, and this will drive the economy this year.
Services as usual are expected to be buoyant.
RBI figures for April appear optimistic. The incremental deposit growth was Rs.106 bn (last year Rs.58 bn), while credit growth was Rs39bn, against a decline of Rs.25 bn last year.
Although it is too early for anyone to stick his neck out to predict a revival, we guess it is time to put on our macroeconomic hats and start investigating...
Market mood
* Massive purchase by the FIIs to the tune of about US$200mn or Rs.8291 mn pushed the Sensex further by 9.9 per cent. The Sensex continued its upwards journey and has added 800 points in the last 10 days.
* The market is technically strong with short position in the pivotals. The lower badla rate with negligible stocks attracting undha badla indicate that the purchase during the week were mainly for delivery and not for speculation. This is also borne out by FIIs investment figures.
* The net outstanding position for the week was slightly higher than last settlement at Rs11.7bn. ACC and Castrol attracted Undha Badla due to impending rights and bonus issue. RIL and Infosys have entered no delivery period.
* The small investor has not yet entered the market. Most people who have not yet invested in the market, may do so now as they feel left out.
Investment Strategy
* We see a distinctive investment interest in industrial, cyclicals and commodities. The FIIs are bargain hunting and this will drive the market up.
* Investors can increase their exposure to industrials and select
cyclicals. One should not increase one's exposure to software sector and if the exposure is already high should reduce it. Q1 results of software stocks, will be key to re-start the software rally.
* Fresh exposure should be in oil refining/ marketing, petrochemical,
aluminum, and banking stocks and companies like IPCL, RIL, SBI are worth investing in.
News snippets (Domestic)
* Ironically, the reform process has accelerated after the collapse of the government. The outgoing government (which may or may not come in) is in a hurry to take some positive decisions. Several licenses were cleared for capital goods sector.
* Eleven mega power projects, 7 thermal power projects with capacity over 1500 MW and 4 Hydel power projects with capacity of over 500 MW have been exempted from custom as well as counter vailing duties .
* The government has allowed setting up of Rs 1 bn venture capital for IT companies. The government plans to expand definition of venture capital to include equity related instruments such as convertible debentures as well for tax concessions and also expand the eligible sectors.
* State Bank of India's deposits recorded a satisfactory growth of 13% yoy in FY99 and a similar 12.7% growth in advances. As at FY99 end SBI's advances stood at Rs.760 bn.
* Software sector maintained its tempo of growth. In FY99 exports jumped by 82% yoy. Leading companies are coming of age. The top five companies together accounted for 20% of total software exports.
* T.V. and Video software exports were also up by 85% from Rs2.3bn to
Rs4bn. But hardware exports fell by 18% yoy. Thanks to competition from South East Asia.
* Steel behemoth Tisco is restructuring its businesses carried out by its subsidiaries and affiliate companies. More than a dozen subsidiaries were consolidated under four groups namely Steel, allied, refractories and engineering. Is this a precursor to a major restructuring / hive off to joint ventures?
* Forex reserves stood at US$32.5 bn marginally lower than previous week.
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* In Mar '99, diesel consumption grew by 11.2% on top of 10.1% growth in Feb'99. A number of Asia Pacific petrochemical plants will shut down for routine maintenance till end of August 1999. Share prices of petrochemical companies such as Hanhwa or LG on Korea stock exchanges have more than doubled in the last 3 months.
* A surprise! Indian Airlines has increased its market share from 52% in January 99 to 58% in May at the cost of Jet Airways and Sahara. This was driven by introduction of 10 daily metro shuttles between Bombay and Delhi. About 25% of traffic comes from Bombay Delhi route alone.
* IPCL plans disinvestment with the advisory support from SBC Warburg,
Dillon Reid.
* Foreign direct investments in major ports primarily for setting up
container handling terminals is expected to be Rs20bn in the current year.
* Competition in credit card business is intensifying ceaselessly. Times bank has entered into a tie up with Master Card International to offer Maestro debit card.
* Indian Telecom sector is set for a major war. The Department of
Telecommunications (DoT) plans to enter as a third cellular operator in 17 cities including key business centres like Bangalore, Jaipur, Hyderabad, Chennai, Calcutta, Ahmedabad, Pune.
* Bajaj Auto has become the fifth largest share holder of ICICI with 3.04% stake. Bajaj Auto has been buying ICICI shares as an investment from its surplus cash over the years.
* Ranbaxy has been in the limelight for a variety of rumors, from sale of molecules to sale of stake to Pfizer. Despite lackluster result in Mar '99 quarter, the scrip has witnessed heavy activity and buying from interested sources.
* Crude oil prices globally have shot up by almost 50% from the low in the last two months. However, Indian consumers are insulated as the government has decided not to increase prices of controlled petroleum products but absorb the price increase in the oil pool account which has significant surplus now.
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(courtesy:Proibity Research) |
