Nothing is guaranteed!

It was yet another week where markets saw a downward trend. After losing over 1% last week, the current week also saw profit booking, which pushed the indices (down 1.5% each). It must be noted that this week, FIIs also booked profits.

After losing ground last week, the markets closed the first trading day of the week on a significantly strong footing on the back of expectations that the on-going correction was over. This led to some all round buying on the bourses, which saw the indices gain about 1.5% on Monday alone, despite some initial weakness. However, what followed over the next three trading sessions caught many investors on the wrong foot, as another round of sell-off was witnessed on the bourses.

According to the SEBI data, after positive investments for the first half of the month, FIIs were net sellers in equities on Monday, Tuesday and Wednesday to the tune of US$ 26.4 m. This seemingly was not accepted well by the markets. However, Friday's late buying at lower levels lifted indices by over 1% in the closing hours of trade. It must be noted that with the current week's losses, the indices have lost about 7% from the highs achieved on November 4, 2003 (see chart above). Having said that, looking the way indices have been moving in the last two weeks or so, volatility is on the higher side. While sentiment continues to remain positive with investors for the medium term, markets seem to be lacking a sense of direction for the near term.

Now, looking at some key news events for the week:

1. The Apollo Tyres board approved the sale of a 14.9% stake to Europe's largest tyre maker, Michelin. However, the stock was hammered on the bourses owing to the fact the allotment was made at Rs 235 per share as against market rumours of Rs 270 to 300 per share. The stock lost 16% this week.
   
   

2. A key development during the week was the in-principal approval by the Supreme Court to reconsider its decision of stalling (for parliamentary approval) the divestment of the two oil-majors, HPCL and BPCL. This bit of news rekindled investor interest towards the PSU sector as a whole, particularly HPCL, which gained with 1% gains for the week. However, with overall weakness in the markets, BPCL could not hold ground (down 3% during the week). Considering the past track of the government on PSU disinvestment front, it is wise to wait for clarity.
   
   

3. Reliance (RELI.BO, news) saw some weakness during the week. On the one hand, there were reports that the company's bid for the US telecom infrastructure company, FLAG, may fall short of competitors. On the other, reports stated that Canada based Niko Resources, which has a 10% equity in Reliance's D6 deepwater block in the Krishna-Godavari Basin, has scaled down the estimates of recoverable gas from the site from the earlier 9.9 trillion cubic feet (TCF) to 8.6 TCF. However, Reliance has defended its estimates of 14 TCF. The stock lost 2% during the week.
   
   

4. i-flex solutions has entered into an alliance with IBM for the global sale of its key product 'Flexcube'. The company will thus be able to strengthen its presence in the European and Asia-pacific markets. This apart, the two companies will also be jointly promoting i-flex's business intelligence and analytics product suite, 'Reveleus'. The stock gained 4% during the week.

Going forward, as the market undertone continues to remain bullish, the scenario going forward for 2HFY04 continues to remain very positive. The negligible FII outflow on certain days of the current week should not be at the top of minds in the overall scheme of things. It must be noted that in 2003 to date, FIIs have already invested US$ 5.1 bn in Indian equities.

What do retail investors do at the current juncture? While we remain optimistic about the Indian stock market over the next two to three years, one has to re-look the stock selection process.

We are concluding this article with some questions to ponder for investors in general.

1. Does a bull market really alter the risk profile of stocks in general? Do equities become `less risky' in a bull market as compared to a bear market?
   
   

2. What if outperformers in the past underperform benchmark indices in the future, as growth in earnings for the next one to two years seem to have been already reflected in current valuations?
   
   

3. What if there is an upward pressure on interest rates given the ever-rising fiscal deficit of the central government? If corporate investments were to gain momentum as they are, can liquidity continue to remain high?
   
   

4. Since there is an upward movement in interest rates in select global markets, will fund flow continue to remain robust as the way they are currently? Can India lose its `attractiveness' on a relative basis? It has to be remembered that India just accounts for an estimated 0.5% of world market capitalisation.

We would like to re-iterate our view we had when the stock markets were at 4,700 levels not so long ago.

1. While the stock market per se could remain volatile, the Indian stock market is a bottom-up story. There are companies that could outperform benchmark indices as well as index heavyweights in the future. It is not necessary that the index have to move up for investors to make money in equities. Even during the so-called 'bear phase' in the last three years, a number of stocks have outperformed indices hands down. Stock selection is critical. In a volatile market, it is safer to stick with quality names instead of investing in 'emerging mid-caps'.
   
   

2. Expectations of 30% to 50% return on equities in a year on a consistent basis from the current levels are not realistic. While long-term prospects look impressive on fundamental premises, return expectations have to be lowered. Remember, risk increases in proportion with return. Nothing is guaranteed! Happy Investing!

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