The Hindu Business Line : Santa Claus rally

Wall Street called it a Santa Claus rally as the Dow Industrial Average peaked to a three-year high and the American indices finished the holiday week on a buoyant note. But the Dow's three-year high pales into insignificance compared to the party at Dalal Street. Both the Nifty and the Sensex have been hitting all-time highs in quick succession in the last fortnight.

With the stock price of many companies doubling in the last one year, equity experts are forecasting an even greater party during 2005. So what makes them so bullish? A buoyant economy, attractive valuations, booming corporate profits, more efficient and professional management, and a stable rupee are some of the reasons contributing to the vote of confidence in Indian equity by not only Indian investors, mutual funds and FIs, but also the FIIs. T.P. Raman, Managing Director, Sundaram Asset Management, thinks equity will remain bullish for a couple of reasons; "the fundamentals of the companies look very good and we don't see a downside here... they will only do better and so will the stock market which is a reflection of companies' performance. Secondly the rupee is holding fine, as also the GDP, which is getting revised upward rather than downward."

Add to this the stability of the Government, good performance on the exports front and, "the most important factor of all", the FIIs being very bullish, the equity market is bound to do well.

"The FIIs too watch all these factors; they look at political stability, the regulatory and settlement systems, and the entire stock market mechanism, which is not only fine and transparent, but also speedy. When they put together all these factors they see real value and find the market attractive based on forward earnings."

Raman recounts how the market bounced back really fast after the crash in April-May, and that was a phenomenon that really strengthened confidence in the Indian market. He says the mutual fund industry is seeing "retail inflows in a big way. In fact, mutual funds are now growing purely on the strength of equity funds; the corporates are sustaining only the liquid and floating rate funds. What is sustaining people like us in the fund management industry is the retail flow."

`New confidence'

Maintaining that there is a "new confidence in equity", he adds, "A couple of years ago if we had told people, `why don't you put 10 per cent of your money into equity', they would have hesitated because they were making some decent money — 8-9 per cent returns — in the debt segment. But now they're seeing volatility in the debt segment and most of the debt funds gave negative returns in the last 7-8 months."

With asset diversification becoming the "main mantra, people are willing to put 10-20 per cent of their money in equity."

The mutual fund industry is seeing retail inflows in a big way. - T.P. Raman, Managing Director, Sundaram Asset Management.

Raman thinks the infrastructure sector is bound to do well in 2005 and beyond, as the Government appears to be deeply committed to its growth.

"So all the sectors covered by infrastructure — both the main and supporting industries like pipes, cables, wires, aluminium and other metal industries — will grow as also those associated with power generation. The pharma sector is already doing very well; Indian pharma companies are going global, they're looking at global acquisitions and filing for patents with the FDA. The auto industry too is looking good and sustaining growth both in the two and four-wheeler segments... which is a reflection of people shifting from two to four-wheelers, and small to big cars." FMCG companies will also do well as consumption is growing. "Everything from large to mid-cap is growing because there is a general trend of growth."

To cash in on this growth, Sundaram will be launching new funds. It has SEBI approval to launch Sundaram SMILE (small, medium and India's leading equities), a pure equity fund that might hit the market in early January.

The company is also looking at a series of close-ended debt funds called Sundaram Capital Plus, where 93 per cent investment will be in debt and 7 to 8 per cent in equity in the derivatives segment "to get better returns."

This scheme, with an 18-30 month period, is awaiting SEBI's okay. "The idea is people should stay longer and not worry about daily NAVs."

Raman's advice to retail investors: "Have an asset diversification and spread your money across various investment classes — equity, debt and bank deposit. The second mantra is to do it systematically; there is no good time, bad time, right time, wrong time... any time is good time for investment."

This time the rally is broad based. The valuations are much cheaper and growth is happening. - Arun Kejriwal, Director, Kris, Mumbai.

Mumbai-based Arun Kejriwal, Director, KRIS, is extremely bullish about the Indian equity market.

"The valuations are attractive. Not only is the economy growing, even corporate results are showing a growth and the Sensex companies are expected to grow at around 18 per cent for year ended March 2006."

The projected liquidity flow from FIIs next year, to the tune of $12 billion, against a little over $8 billion in 2004, would ensure that the equity market remains buoyant.

He feels that even though the Sensex is at an all-time high of around 6,500, "the difference with the year 2000 (when the technology bubble burst crashing the equity market) is the fact that this time the rally is broad based. The valuations are much cheaper and growth is happening. More important, with a stable currency and the rupee appreciating — something that has never happened — investment in India becomes attractive for foreigners."

For example, if the FIIs get a return of 15 per cent on their investment, they make an additional 5-6 per cent on the currency, taking the total to an impressive 20-21 per cent.

Transparency and trust

He thinks that with the entry of STT (securities transaction tax) the income from the equity market has now become transparent. "The quality of income is not questioned or questionable, and this is bringing many more people into the market."

Kejriwal thinks the top sectors of 2005 will be capital goods, pharmaceuticals, banking, power generation and metals. "Contract manufacturing and R&D development in the country make pharma an attractive sector. If growth and capex is planned, banking cannot be far behind, and we have seen credit off-take improving. Metals and the power sector will also do well," he adds.

His top five picks from each of these sectors are Siemens, Hindalco, NTPC, SBI and Ranbaxy.

With above-average intelligence, you can even get a 40-50 per cent return in 2005. _ Porinju Veliyath, CEO and Portfolio Manager, Equity Intelligence, Kochi.

Kochi-based Porinju Veliyath, CEO and Portfolio Manager, Equity Intelligence, too is very bullish on the Indian equity market. "In the last two years, the market has been very favourable for smart investors and, similarly, the next year too money can be made by smart investors. If you have above-average intelligence, you can even get a 40-50 per cent return in 2005."

So what makes an investor "above-average smart"?

"Use common sense and let the key word in your dictionary be growth. Ours is the second fastest growing economy in the world and this is reflecting in many companies. We now find some of the old, family managed companies going in for more efficient and professional management. Such companies might grow at 50-60 per cent for a short period... say two to three years. Smart investors can take advantage of such opportunities, but they have to keep their eyes and ears open and look for the right stock ideas, watching closely the corporate development, industry development and restructuring happening in companies."

He says India has many globally competitive industries and if this is mixed with management competency, particularly in small and medium companies, it can bring wonderful results. He adds, "At the macro level, international players are extraordinarily bullish about the Indian economy. I believe that at least for the next five years the India growth story will be intact. Even though most of us are not happy with the political management, in spite of that we're growing and I feel the economic management by our politicians is going to improve."

On the sectors that will outperform the market in 2005, Veliyath says, "In IT everybody knows our competitiveness and even though a firm rupee may squeeze profit margins, IT companies with vision will do very well."

He is also bullish about the pharmaceutical industry and says that "smart investors" should watch out for the small and mid-segment rather than big companies because the growth here will be faster, yielding higher returns.

Opting to recommend `wealthy companies', he clarifies, "One example is United Breweries (Holding) Ltd which is the holding company of McDowell, United Breweries and other group companies which have a holding of 10 per cent in Aventis Pharma, a blue-chip MNC pharma company." The construction of the UB hi-tech city on prime land in Bangalore, coupled with UB (Holding) being the cent per cent owner of Kingfisher Airline, this stock will do very well. "I identified this stock a few months back at Rs 38; now it is around Rs 100 and I expect it to triple in the current year."

His other four picks are Indian Rayon, Raymond, Pfizer and Forbes Gokak. "I had bought Forbes Gokak at Rs 100; in a year it has gone up to Rs 270 and has the potential to double during the current year."

Strong fundamentals

If interest rates remain low, more domestic investors will come into equity. - Jitendra Kewalramani, investor and stockbroker, Mumbai.

Jitendra Kewalramani, a savvy investor and stockbroker, is confident that the equity market is going to do well in 2005. "The market is driven purely on liquidity and I find the valuations are fair, and the stocks neither under or over priced. If the dollar weakens further, more FIIs will come into Indian equity."

He thinks a good sign this time is that even though the indices are at an all-time high, "normally this happens and the Sensex goes around 6,200 or so, there is some bad omen or the other which ensures it doesn't sustain and falls by 500 to 1,000 points. But this time it has sustained on fundamental reasons like corporate results, FII inflows and everything is supporting the market on the India story which is really giving results. If interest rates remain low, more domestic investors will come into equity."

He thinks sectors like steel, cement, power, textiles, agriculture, fertilisers and tractors will do well. His advice to small investors: "Be patient and disciplined; in order to get good returns remain focussed on fundamental stories and not on anything and everything; any 2 or 4 rupee stock might have gone up to 10 or 12 rupees because everything is going up. But if you get into fundamentally good companies, you'll get good returns."

But urging caution, Kewalramani says that the Sensex might go up to 6,700 or 6,800; but after that there could be a reaction, so investors would do well to remain watchful and cautious.

His top picks are Cummins India, Syngenta India, Atlas Cycles, Swaraj Engines, GSFC (Gujarat State Fertilisers, and Chemicals) Escorts and Essel packaging.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Santa Claus rally

And the winner is...

High '05

Big B rules...

Getting together at Bangkok

Where gopurams beckon

Kondapally bomma weaves her magic

`Education is the best investment'

When a tsunami strikes...