During
the calendar year 2013, the S&P BSE Sensex 30 index clocked a return of 9
percent, while the NSE’s Nifty 50 index rose by 6.8 percent. But the BSE Dollex
30 index recorded a negative return of 3.5 percent due to steep depreciation,
around 12 percent, of Indian rupee against the US dollar. Dollex 30 is
dollar-linked version of Sensex. Let us see which sectors have come out winners
and losers and what is in store for Indian stocks in 2014.
Sectoral performance:
Among
the sectors that have done well are BSE IT index and Healthcare indices, with a
gain of 60 and 23 percent respectively. Significantly, both these sectors have
partly benefited from the rupee fall. Other things that benefited these sectors
are strong export growth, investors’ bias towards companies with strong balance
sheets and better corporate governance, good potential for growth and slight
recovery in the US
economy. Other sectors that have done well include FMCG and Automotive sectors.
Real
estate and public sector companies continue to be among the worst-performing
sectors in 2013. The BSE Realty and PSU indices showed a negative growth of 32
and 19 percent respectively.
Returns and Volatility:
The
Sensex return of 9 percent in 2013 does not reflect the volatility of stock
markets in 2013. The benchmark index started the year with 19,510 and reached a
peak of 20,328 (intra-day) on 17May2013. But due to fears of Fed tapering,
steep fall of rupee against dollar, high current account deficit and
policy-related paralysis in India;
the index fell to an intra-day low of 17,922 on 27Aug2013.
After
the US Federal Reserve deferring the proposed tapering, Raghuram Rajan taking
over the reins of Reserve Bank of India and return of FII portfolio
inflows; the Indian stock markets recovered sharply with the Sensex reaching an
intra-day high of 21,484 on 09Dec2013. By the end of December 2013, the index
closed at 21,171. Between May and August 2013, the Sensex fell by 12 percent.
But
between September and December 2013, the benchmark index rose by 18 percent,
giving some cheer to scary and wary investors. During 2013, the FIIs have
brought in USD 20 billion to Indian equity markets.
Why the Difference between
Sensex and Nifty Returns?
While
Sensex recorded a gain of 9 percent, the Nifty rose by 6.8 percent only. The
difference is due to the fact that Sensex consists of 30 companies, while the
Nifty reflects prices of 50 blue chip companies. Moreover, at the start of
2013, Nifty was concentrated toward banks and financial companies. During July
and August 2013, banking sector lost heavily—though banking stocks recovered in
the last four months. For 2013, the BSE
Bankex lost 9.4 percent—causing the difference between Sensex and Nifty
returns.
BSE Market Capitalization:
Total Market Capitalisation of All
BSE companies:
|
|
Rs Crore
|
USD Billion
|
USD-INR
|
Dec.2007
|
71 69 985
|
1 818
|
39.41
|
Dec.2010
|
72 96 726
|
1 616
|
44.44
|
Dec.2013
|
70 44 258
|
1 125
|
61.80
|
Note:
Figures are end of the month; USD-INR is US dollar-Indian rupee exchange rate
|
Some
interesting facts come out when you look at the above table. The market cap of
all BSE companies at the end of December 2007 was Rs 71.70 lakh crore,
converted to USD 1,818 billlion. But the market cap slumped to USD 1,125
billion (a fall of 38 percent) by the end of December 2013, though in rupee
terms it fell by only 2 percent.
Two
factors contributed to the steep fall in market cap, in dollar terms, of all
BSE companies. One is the steep depreciation of rupee against the dollar.
Another factor is the fact that broader indices themselves have fallen. For
example, BSE 200 index lost 4.7 percent between December 2007 and December
2013.
Performance Chart for
2013:
Indices
|
31-Dec-13
|
31-Dec-12
|
% change
|
|
|
|
|
BSE
Sensex
|
21 171
|
19 427
|
9.0
|
BSE
DOLLEX 30
|
2 816
|
2 917
|
(3.5)
|
BSE 200
|
2 531
|
2 424
|
4.4
|
BSE Mid
Cap
|
6 706
|
7 113
|
(5.7)
|
BSE Small
Cap
|
6 551
|
7 380
|
(11.2)
|
|
|
|
|
BSE Auto
|
12 259
|
11 426
|
7.3
|
BSE
Bankex
|
13 002
|
14 345
|
(9.4)
|
BSE
Capital Goods
|
10 264
|
10 868
|
(5.6)
|
BSE
Consumer Durables
|
5 821
|
7 719
|
(24.6)
|
BSE FMCG
|
6 567
|
5 916
|
11.0
|
BSE
Healthcare
|
9 966
|
8 132
|
22.6
|
BSE IT
|
9 082
|
5 684
|
59.8
|
BSE Metal
|
9 964
|
11 070
|
(10.0)
|
BSE Oil
& Gas
|
8 834
|
8 519
|
3.7
|
BSE Power
|
1 701
|
1 991
|
(14.6)
|
BSE PSU
|
5 910
|
7 335
|
(19.4)
|
BSE
Realty
|
1 433
|
2 111
|
(32.1)
|
BSE TECK
|
5 051
|
3 428
|
47.4
|
|
|
|
|
Nifty 50
|
6 304
|
5 905
|
6.8
|
As
can be seen from the above table, the performance of Sensex, BSE Mid Cap and
Small Cap indices differs widely—though select mid cap and small cap companies
delivered good to decent returns in the latter half of 2013.
It
is interesting to note that mid cap and small cap stocks did better than Sensex
in 2012. Investors mood changes—some years they’re optimistic about large caps
and in some years they shift their bias towards mid and small cap companies. In
general, it’s difficult to predict the mood swings of investors.
What to Expect in 2014?
However,
my sense is that small cap and mid cap companies may do well in 2014, subject
to the caveat that 2014 general election will throw up a stable government and
the Indian economy will fare well next year. Having said that, I would like to
add that investors are required to be more diligent as far as small cap and mid
cap companies are concerned. They’ve to be very careful about choosing their
stock picks. If they’re not experienced, they better consult their financial
advisors before investing.
World
markets, particularly the US and Japanese, have done extremely well with
S&P 500 rising by close to 30 percent and Nikkei 225 by 57 percent in calendar year
2013.
I
always maintain that investors have to take care of their asset allocation
first. After asset allocation, they’ve to take a portfolio approach towards
their equity investments. At this point of time, my thinking goes like this.
Suppose you have a stock portfolio with stocks from companies with strong
balance sheets, robust cash flows and high perception of corporate governance.
Such a portfolio may not outperform benchmark indices if the economy quickly
makes a turnaround and interest rates start falling.
This
is due to the fact that any sharp turnaround accompanied by falling interest
rates will benefit highly-leveraged companies and where investors are highly
pessimistic about prospects. (Readers have to take my views with a pinch of
salt, because I may change my view quickly depending on market dynamics and
outlook on economy).
Let
me assume that around 70 percent of your money is currently invested in companies
with strong cash flows, decent balance sheets, zero debt and high profit
margins.
My
feeling is that around 20% to 30% of your money can be allocated to companies
with moderate debt (means debt-equity ratio of 0.4 to 0.8), strong corporate
governance and managements, reasonable but not very high interest coverage
ratios, low operating profit margins and with potential to increase capacity
utilization in the next 12 to 18 months. (Many companies are at present
struggling with low capacity utilization which negatively impacted their profit
margins).
The
idea is that if and when the expected turnaround happens, these companies with
moderate debt will be highly benefited as compared to companies with strong
balance sheets and rich valuations—that have already been discovered by the
market. You may have observed this kind of churning actually happening to some
extent in the market in the last two/three months—select stocks in auto ancillary,
NBFC, capital goods and power equipment sectors have risen sharply.
It
goes without saying that higher risk is usually rewarded with higher returns,
provided you do your homework properly—peppered with some luck.
Of
course, in the long run (beyond three years), companies with strong balance
sheets, robust cash flows, pricing power and competitive advantage will
continue to perform well. For a long time, I have preferred companies with
strong balance sheets, low debt-equity ratios, strong cash flows and high
growth potential.
But
now I am thinking that as long as around 70 to 80 percent of your money is
invested in companies with strong balance sheets, competitive advantage,
pricing power and strong profit margins; you can slightly tilt 20 to 30 percent
of your money towards companies with moderate debt, strong managements, low
interest coverage ratios and low profit margins. This churning can be done in
the next six to nine months in a gradual manner—keeping in mind the changing
market dynamics, electoral math and progress of India/world economy.
Select
PSU stocks may offer some protection from any downside that is anticipated
around the 2014 general elections.
This
is not to say that India
has no problems. As you are aware, India is currently bedeviled with
persistently high inflation and moribund investment cycle—not to mention the
high cost of subsidies and government policy/regulatory issues. The RBI has
kept its option of raising interest rates open.
Government’s
fiscal deficit is a problem as revenue collections have slowed down, while non-plan
expenditure (mostly subsidies) shoots up. But unfortunately, plan expenditure
is being cut according to several reports.
Global
problems may continue to haunt the Indian markets going forward. The
government’s divestment effort is making very slow progress.
Finance
Minster P.Chidambaram has been trying to limit fiscal deficit to the budgeted
4.8 percent (of GDP), through some creative accounting and cut in plan
expenditure. Current account deficit was controlled by imposing severe curbs on
gold imports.
It
is naïve to expect that government diktats can wean Indians away from the
allure of gold. Once the gold import curbs are removed, the gold buying spree
will come back with a vengeance. The government seems to have made no serious
effort to increase and widen export basket and boost manufacturing sector.
Some
headway is being made on the policy front, after years of policy logjam by the
central government. Subsidies are cut partially in diesel, LPG and petrol.
After a decade, Railway fares too have been increased though marginally. Tesco
of the UK
has announced FDI in multi-brand retail sector in partnership with the Tatas.
Abu Dhabi-based Etihad Airways recently bought a 24 percent-stake in India’s Jet
Airways. Air Asia of Malaysia is planning a joint venture with Tatas.
Share
repurchases (buybacks) by listed companies are happening. Many foreign
promoters—like, Unilever, Vodafone plc and Glaxo Pharma—have been increasing
their stake in Indian subsidiaries. In
the last two to three years, foreigners seem to be more optimistic about the
prospects of select Indian companies rather than Indian investors, who have
been selling heavily. FIIs have pumped in USD 20 billion into Indian equities
in 2013.
My
sense is that BSE 200 broader index may give 15 to 20 percent return in 2014.
My optimism stems from the fact that many Indian companies have been able to
weather the storms and will be able to generate decent profits and robust cash
flows in future also—despite the uncertainties surrounding the political,
fiscal and external fronts.
Notes:
BSE – Bombay Stock Exchange, FII – Foreign Institutional
Investor, NSE – National Stock Exchange and PSU – Public Sector Undertakings.
- - -
Disclaimer: The author is an investment analyst, equity
investor and freelance writer. The author has a vested interest in the Indian
stock markets. This write-up is for information purposes only and should not be
taken as investment advice. Investors are advised to consult their financial
advisor before taking any investment decisions. He blogs at:
Connect with him on twitter @vrk100
