Investors remain edgy

Thu, 6 May Closing

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Although the markets came off the day's lows during the closing hours, they still managed to end the day significantly in the red. Thus, while the BSE Sensex closed lower by around 100 points (0.6%), NSE Nifty lost to the tune of around 35 points (down 0.7%). Also, while BSE Midcap suffered similar declines, the fall in the case of BSE Small cap was only marginal. Advance to decline ratio came in at 1:2 on the Sensex.

While other Asian markets closed in the red, Europe is witnessing buoyancy at the moment. The rupee was trading at Rs 45.2 to the dollar at the time of writing.

There seems to be no end in sight for the debt contagion that has gripped the Euro region and this seems to be keeping investors on tenterhooks. We believe that the markets are poised quite delicately at the current levels and the risk reward ratio of investing in Indian stocks from a near term perspective seems to be skewed significantly in favour of the former. First of all, valuations aren't all that cheap and secondly, with threats of sovereign defaults looming large, investors could abandon risk assets like emerging market stocks in a jiffy and move to safer havens. Thus, extreme caution is the need of the hour and investment needs to be made with a strictly long-term approach.

Auto stocks traded rather mixed today with Ashok Leyland and Escorts ending on the positive side of things. The sector stocks have had an excellent run so far and not without reason. Everything that had to go right with the sector has gone right in the past 12 months or so and hence, most companies were able to post record profitability. But not anymore. Quite a few headwinds have started emerging. Notable ones being the possibility of further rise in interest rates and hardening of raw material prices. These are likely to cast a negative spell on the profitability of the sector companies and hence, we could be in for a tough FY11 for these companies. For the long term though, some pockets like the two-wheeler space still looks very attractive. Although growth is likely to happen in the realm of passenger cars as well, intensifying competition has made picking up winners a difficult proposition.

It was not until long back that the mood in the divestment ministry was rather somber. Public issues put out by the PSUs were not meeting with the desired response and the divestment program was at risk of not being able to meet its target. However, the success of SJVNL seems to have changed all that. The offer from the company saw a strong participation from the retail investors with the issue getting subscribed more than 3 times. This has now put the spotlight firmly back on the future divestment candidates. Engineers India, which is likely to be divested in June, is scorching the charts on the bourses and the prospects are also looking upbeat for companies like Coal India and Hindustan Copper. Looks like the Government will finally be able to come somewhere close to the divestment target of Rs 400 bn.