Stocks sink on rain scare

Worst weekly fall for Sensex since October

Stocks sank once again, completing the Bombay Stock Exchange Sensitive Index’s worst week since October, after Agriculture Minister Sharad Pawar said monsoon rainfall has been deficient.

Pawar said in the Lok Sabha today that the northwest region, which included the biggest grain growing states of Punjab, Haryana and Uttar Pradesh, had seen deficient rains. Though Pawar hoped the situation would improve and India had enough foodgrain to meet demand for 13 months, the market wasn’t convinced.

The Sensex fell 253.24, or 1.8 per cent, to 13,504.22. The index has dropped 9.5 per cent this week. The S&P CNX Nifty Index on the National Stock Exchange fell below the support level near 4,000 for the first time since election results in mid-May.

India was the worst performer among its global peers this week. The Nikkei -225 and Hang Seng lost 5.39 per cent and 2.72 per cent, respectively. The Nasdaq and Dow Jones had lost 2.45 and 1.18 per cent till Thursday.

The better-than-expected Infosys results today had led to a 300-point rally in the morning, but the monsoon scare played spoilsport with Reliance Industries leading the slide, losing 4.2 per cent to Rs 1,775.15.

The information technology (IT) index was the only sectoral index in the green and closed up by 2.17 per cent. Infosys rose 2.97 per cent while other IT majors Wipro and TCS gained 1.56 per cent and 3.37 per cent respectively.

But market experts do not believe that IT stocks can rise too much. “While Infosys’ results were a pleasant surprise, but IT stocks were already valued at 12-17 price earnings,” said Deven Choksey , managing director, KR Choksey.

All the other sectoral indices closed in the red today. Oil & gas, power, capital goods, realty and public sector units were down between 2 and 3.28 per cent.

The other major laggards in the Sensex were Reliance Infrastructure, Jaiprakash Associates, Reliance Communications, HDFC and Sun Pharma. All of them were down between 4 and 6.5 per cent. Reliance Industries and Mahindra fell 3.99 per cent and 3.88 per cent.

The market breadth was negative today. Out of 3,915 stocks traded, 2,714 declined while 1,098 advanced.

During the week, Reliance Infrastructure lost the maximum at 20.3 per cent. Tata Steel (19.4 per cent), DLF (17.3 per cent) and Reliance Communications (17.2 per cent) were the other major losers. ITC added 9.7 per cent this week, followed by Hero Honda (5.7 per cent) and Maruti Suzuki (4.5 per cent).

Stocks with low price-earnings ratio lead the rally

BSE 500 stocks with P/E of less than 10 deliver 50% returns.

Which category of stocks has made the biggest gains in the recent market rally? Believe it or not, it was the really beaten-down stocks, trading at a single digit price-earnings (P/E) multiple.

An analysis of stock price returns since March 9 shows that investors cherry-picked low P/E stocks from the Sensex and BSE 500 baskets; making them the top performers in this uptrend. Price-earnings ratio is a measure of how expensive or cheap a company’s stock is, relative to its earnings.

In the Sensex basket, low P/E stocks such as Tata Steel and Tata Motors delivered over 60 per cent returns.

Lower the better

BSE 500 stocks with a P/E of less than 10 (as on March 9) averaged a stellar 50 per cent return till date, compared with the index returns of 35 per cent. The lower the P/E, better the returns, suggests the data. Stocks with a rock-bottom P/E of less than 5, delivered even higher returns of 56 per cent on an average. This analysis has used the trailing standalone earnings of companies, for four quarters. Only stocks with a meaningful P/E were considered.

The majority of stocks with 50 per cent-plus returns belonged to the low P/E club. About 170 stocks in the BSE 500 surged by over 50 per cent in this period. Eight out of every 10 of these stocks had a price earning multiple of less than 10 as on March 9.

In stock markets, price earnings multiple is often used as a measure to judge how expensive a stock is, in relation to the market or the sector in which the company operates.

Attracting retail investors

In this context, investors perhaps saw value in stocks such as Gitanjali Gems, Rolta India, Tanla Solutions, Prime Focus and CMC, whose prices discounted their trailing four quarter earnings by just 2-4 times when the Sensex was at its three-year low in March. These stocks have more than doubled since then.

One key aspect of this rally is that investors bought cheap stocks, without paying much heed to the uncertainties surrounding the company’s prospects. Beaten down stocks from sectors such as realty, that are yet to witness a clear recovery in their fundamentals, too were sought after for their low P/Es as well as low absolute prices.

Unitech, HDIL, Phoenix Mills and IVR Prime Urban Developers were some of the stocks with P/E of less than 5 that have surged over 80 per cent.

Interestingly, the shareholding pattern as of March 2009 reveals that some of these low P/E stocks were offloaded by foreign institutional investors in the January-March period and were lapped up by retail investors. Stocks such as Rolta India, Aban Offshore, Balaji Telefilms, Suzlon Energy, Bharati Shipyard witnessed increased retail holding in the quarter ended March compared with December, even as FIIs sold.

On the other hand, many quality stocks also lost out on the rally, probably as a result of high valuations. Stocks such as Dabur India, Hindustan Unilever, Marico, Power Grid Corporation and NTPC, sporting PEs of over 20, had to settle for modest returns of 5-20 per cent.

High P/E stocks (valued over 20 times their per share earnings) that were laggards belonged to sectors such as consumer goods, pharmaceuticals and power.

Stock markets: Against all odds?

As the country readied itself for the election results last week, the equity market followed the action. While the Nifty swung on both the sides,

it managed to close the week with a decent gain of 1.5%. Though the index failed to move past a resistance of 3715, it still showed a strong resilience against a fall below 3530. The volatility in the market as reflected by the Nifty Volatility Index (VIX) rose to the late November 2008 levels.

However, the humungous rise in the open interest of Nifty options on Friday shows that traders were getting ready to take the election result in their stride even as the speculations over the structure of the expected coalition government mounted.

While Nifty oscillated in a range of 175 points, it closed above its 50 week moving average (WMA) for a third consecutive week. Besides, the cross over between its 10 WMA and 20WMA seems widening out. This is unlike May 2008 when the index managed to close above the crucial indicator of 50 WMA but the 10 WMA failed to rise past 20 WMA and the gains were given away in the subsequent week. In contrast, the 10 WMA seems moving closer to 50 WMA, citing a buoyant short-term momentum. Last time the cross over between these two moving averages took place in October 2004, after which we saw the mother of all bull runs.

While the Nifty portrays a possibility of a massive upside, its international counter part DowDJIA) trading at 8290 is down 2% for the week at the time of this article going to press. Like its Indian peer, the moving averages for the index show a firm grounding. The downside seems strongly floored by the 50 and 100 Day Moving Averages (DMA) at 7933 and 7850 respectively. A cross over between these moving averages can cause the Dow show a bolstering move towards 8750.

While Indian VIX is now widely followed by the traders, in the past it has failed to optimally reflect the market sentiment. A more efficient indicator of the volatility, CBOE (Chicago Board Options Exchange) VIX, which rose as high as 89 during the latest bear run, has not managed to breach below its seven month trading range. However, as can be seen from the chart, it continues to find support from a trend line from its February 2009 lows. Once the VIX manages to give away this support, the rally in markets is likely to experience a consistent escalation.

Meanwhile, an apparent high volatility in the domestic market has trapped our cherished friend, ET Intelligence Group’s Smart Money Ratio (SMR) in an arrest in its ten-month trading range. The indicator has shown a bounce from a trend line from the point when it first breached out in the buy territory during early March. The SMR may have to breach below this trend line for a confident bullish trend.

Fresh Trade :

While the Nifty closed in a negative territory three times last week, the May future almost always closed with a premium over the underlying index. A study of the open interest buildup in the near month options reveals that the traders are embracing themselves for a possible big move on the upside. There has been an average buildup of 22% in the May calls of 3600- 3300 range on Friday. Likewise, even as 3800 put continues to hold the maximum open interest, there has been an addition of 35% in 4000 puts.

One could thus go long on Nifty once the barrier of 3720 is breached tidily if the SMR simultaneously manages to breach below the shown trend line. The initial target for the move will remain in 3800-3850 range, while an eminent control of bulls from then on can take it towards 4050-4100 levels. The stop loss for the trade should be kept as a close below 3530 or a rise of SMR past its 11th May high of 48.80 Jones Industrial Average (

Stable Govt. to drive re-rating of stocks

■ Good governance in AP & Delhi voted; Buy Infra Builders
A stable Govt. in UPA alliance & voting back of Andhra (AP) & Delhi Govt. is great news for pick-up in Infra spends. Budget deficit will encourage divestment of PSUs such as NTPC, NHPC, Power Grid and more PPP projects, that should necessitate progressive policies in sectors such as power & roads. These coupled with Infra deficits creates a macro framework for robust sustainable growth & that has potential to drive E&C cos re-rating as they move into a higher orbit, in our view. We raise PO to factor-in re-rating across BAS-ML universe with top picks – E&C - BHEL (Rs2000 v/s 1700) & IVRC (255 v/s 215); Reliance Infra, JPA (developers).

■ Vote for incumbent Govt. in AP/Delhi = vote for governance
We attribute the voting back of incumbent Congress Govt. (see table 2) in the state of Andhra Pradesh (AP) led by land mark US$10bn Irrigation spends and Delhi – fixed water, power and transportation (metro rail + roads) problems. While this will not only encourage in-coming Govt. to accelerate Infra spends, but it will also act as role model other Govt. Loss of election by Mr. Balu, ex-transport minister despite win by his party in TN, may be a vote v/s ineffective governance.

■ Buy builders - stocks to re-rate before EPS become visible
Likely improving visibility of Infra capex, potential falling-in place of Industrial capex on return of business confidence coupled with the global liquidity makes for a potent combination to re-rate the sector till the order inflows / earnings becomes visible in the next few quarters. We think that once the earnings catch-up, rich multiples will start to look reasonable.

■ Top Picks: BHEL, R. Infra, IVRC, L&T & JPA

1. BHEL: We raise PO to Rs2000 (1700) as it will be the main beneficiary for the liquidity driven sector re-rating given its visibility of 23% CAGR in earnings, potential for PE expansion to 17.5x (15x) FY11E at 20% premium to Sensex and thrust on power capex incl. the ‘bulk’ ordering by its customers’ – NTPC/DVC.

2. Reliance Infra with surplus equity (~US$1.5bn) may benefit from likely auction of three more UMPP by Govt. in FY10E leading to higher E&C value and value of R. Power investment. Stock is inexpensive at 1.1x consolidated FY09A P/BV.

3. IVRC: We see IVRC to benefit from return of pro-Irrigation capex (70% of its backlog) Govt. in AP. Potential pick-up in roads / real estate capex is +ve.

4. L&T: PO Rs1235 (1110) on benefit from thermal & Nuke power capex, potential pick-up in roads & industrial capex from improving business confidence.

5. JPA: Markets does associate JPA being close to BSP and hence, it runs the risk of not participating fully in the ensuing rally. However, we think that eventually a 40% discount to NAV and strengthening new project pipeline will drive stock.

■ Minister is key catalyst to watch
We think that personalities do matter in polity. We look for change in Industry, and transport ministry, while hope better performing Aviation & Power minister (Jairam Ramesh) to return. Return of aviation minister should secure ADF funding deals.

Will the markets rally from here?

The domestic stock markets, in line with the global markets, are in the midst of a strong rally. The strength of the rally can be seen from the fact that the markets rallied 17.5 percent in the month of April, a surge not seen in last 12 years.

Making this more significant is the fact that the stock indices bounced back from all sharp declines very quickly, ignoring all bad news.

There were buyers for stocks at every decline. The rally was more pronounced in emerging markets with India being the top Asian performer for the month.

Bullish overseas investors:
Analysts, especially from foreign institutional investors (FIIs) and mutual funds with a global presence, are very optimistic about this rally.

They are of the opinion that even after the current gains, the valuations for emerging markets remain attractive, and the rally is expected to continue as the economies in developing nations are proving to be more resilient than what was expected earlier. China's GDP expansion is about seven percent for this year and India is growing at five percent.

Hence, analysts from these institutions feel it is an interesting entry point for long-term investors, and the levels seen over the past six months will be remembered as very attractive in the next few years.

Strong rupee :
Confirming this optimism from global investors, the rupee advanced after the latest data showed that FII stock purchases were the highest since August last year.

The currency strengthened as the signs of a global economic recovery promised to increase demand for emerging-market assets, thereby for the rupee.

The SEBI data showed the net investment by FIIs in equity for April was Rs 6,508.20 crores.

Cautious domestic investors :

Other experts, especially from domestic institutions, are cautious in their optimism about the markets.

They say that what started out as just a slowdown snowballed into recession due to failures of large financial firms. Now that failures and bankruptcies have declined considerably, the markets have stopped going down. But key indicators like industry demand, employment, capital spending and profitability are still declining A recovery in the global economy, which is currently standing at a 'low point', will depend on a rebound in the US economy.

The gross domestic product in the world's largest economy fell 6.1 percent in the first quarter reconfirming that recovery of global markets was still sometime away. In India too the news flow was far from rosy. India's inflation held near a 27-year low. Inflation went up by 0.57 percent year-on-year in the week ended April 18 after gaining 0.26 percent in the previous week.

There are fears that inflation is likely to turn negative from early May. India's diamond sector shed two lakh jobs. The IT industry too announced layoffs. But the biggest fear that India Inc has is that of a hung parliament, which could end the rally in the stock markets.

Hence, domestic institutions actually sold some of their investments in this rally.

Investment strategy :

With experts so divided in their opinions of the markets, the quandary in the minds of individual investors is understandable. A perspective that can help them decide whether to hold on to their investments is portfolio returns.

Rather than worry about whether the market is poised for a decline or not, investors can focus on whether their portfolios have generated the required returns or not. In this rally, some stocks have gained more than 50 percent with some of them rallying up to 80 percent.

If the investors have such stocks in their portfolios they can sell them as their returns targets will be achieved. This rally can be used to rebalance portfolios by weeding out weak stocks.

A good strategy for longterm investors who have already invested in the markets would be to hold on to their investments. They can wait for the outcome of the elections before committing further funds into the markets. Short-term investors, however, can book profits in this rally and wait for an opportune moment to reenter the markets.

Commodities Vs Stock Markets

	Stock markets	Commodity markets
Quality	One unit of a security does not differ from another of the same type in terms of its face value and characteristics.	Each commodity/product have several grades or varieties and each lot in a grade may vary from other lots in the same grade
		Quality also deteriorates due to improper storage and transport conditions. Commodity deliveries therefore have far greater implications for buyers and sellers than mere payment or receipt of contractual price, as in the case of buying or selling of securities
	Most investors in securities do not need any facility for hedging. They invest in securities either to earn regular income from dividend or interest, or to profit from the subsequent price rise.	A commodity futures market is primarily a hedging market, and not a market for delivery. Deliveries need to be issued and received only in a residual sense to maintain a parallel or near-parallel relationship between the physical and futures market prices to facilitate efficient hedging
Price Discovery	Security futures prices have no such equivalent role.	Price discovery by a futures market also has a much more basic role to play in a commodity market than in the securities market.
Factors	Not many (its supply is almost fixed, with demand varying as per the financial performance of the company, or the authority, and general market expectations),	Factors affecting commodity prices are far too many and complex Supply side: depends on conditions such as area or production capacity, weather, infrastructure supplies and inputs like water, power, seeds, yields or processing/ manufacturing out-turns, imports and exports. Demand is determined by the population growth and shifts in demographic characteristics, changes in incomes and exports, besides the diverse elasticities of incomes and prices.
Contract Specifications	For an individual security futures, or even for an index futures of several securities put together, is a relatively simple exercise	More complex and involves specification of quality, delivery, duration etc.,