Winds of change

MARKETS AND YOU

Since October, the Sensex has been hovering between 19,000 and 20,000 points. This may lead many to believe that the market is not seeing a lot of activity. But that's not true.

Just last week on December 11, the Sensex closed at over 20,000 points for the first time. Even the Nifty closed at 6,111 points. But this was quickly followed by a sharp fall of 769 points on Monday, December 17. And in the last three trading sessions, the bulls and bears have been involved in a slug fest.

So what are the signals from this market? Says Mukesh Dedhia, director, Ghalla and Bhansali, "The foreign players who play a major role in market movements are likely to take rest during the end of the year." No wonder, no one is expecting any great movement in the last few days of trading in 2007.

Adds investment advisor Arun Kejriwal, "Mutual funds will make sure that there is no erosion of their net asset values (NAVs) till December 31 (when NAVs are declared). So, we can expect the markets to be slightly up or show some sideways movement without much downside."

However, a trend that has been noticed is that there seems to be a shift in favour of mid-cap stocks. Between late November and early December, both mid cap and small cap indices have been clearly outperforming the Sensex (See Bottom up approach). Says Amitabh Chakraborty, president (equity), Religare Securities, "The mid caps have been rallying well in the last three months."

"I believe that the large caps have had their run and now it is time for select mid-cap stocks to do well," adds Dedhia. His argument is based on the fact that the price/earnings (P/E) multiple of the Sensex is at 25.66 trailing earnings, not too far from the P/E in the peak of the 2000 bull market of 31 times.

So where do we go from here? The year 2007 saw the markets zooming like never before. There were instances when the markets scaled 1,000 points in four to five trading sessions. And investing was never easier, simply because investing even in an index fund (which is the cheapest equity mutual fund category in terms of load and expenses) would have ensured good returns for the investor.

Things are likely to be different in 2008. "In the early part of the year, there can be a case of large caps to do well, because they have been laggards in the last few months. But in 2008, active stock picking has to be done rather than passively following the index," explains Chakraborty.

Agrees Dedhia, "Investment in the coming year has to be more stock-specific. He believes that there would be value pickings in the auto, pharma and IT sectors. Chakraborty's picks in the mid-cap segment are mostly construction companies like D S Kulkarni, HDIL and C&C Constructions. Dedhia is looking at pharma counters like Dr. Reddy's and Cipla.

However, the year's trend is most likely to be set by the fourth quarter results in the US. Says Kejriwal, "By the third week of January, we will get a fair idea of how badly the subprime crisis is likely to hit the American markets. Central banks across the globe are pumping liquidity and slashing interest rates resulting in a weakening dollar. There are fears that liquidity into emerging markets, including India, may slow down.

Most market players feel that issues like the Budget and elections may not have much of an impact in the coming year because the Budget is expected to be populist due to the impending elections in 2009.

All things considered, it's going to be an interesting year for the investor. As Chakraborty puts it, "Depending on the entry point, one can make around 15 to 20 per cent returns, but individual stocks will generate far more aggressive returns."