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Where to invest in 2000

Niraj Bhatt

The stock market has opened with a bang in 2000, gaining sharply on the first two days of trading. Earlier, market experts had predicted the Sensex to touch 6000 points in 2000. Though it is still early days, this target may be surpassed and that too very soon

But on the flip side the Sensex is on the edge and a correction is imminent. Small operators and retail investors have both been trapped earlier at higher levels; there is no reason to believe that this can't happen again. Hence investors should be cautious at higher levels.

At the macro level, there could be a lot of money coming to the stock markets if the insurance sector is opened up. If domestic provident funds and pension funds are allowed to invest in the stock market, we should see a major rise in the Index. Internet broking will also be a reality this year; it will change the way we trade. Futures trading is round the corner too-index futures will take off this year.

Analysts expect a correction from the first day's levels ( when the market shot up 370 points) but the 5000-point barrier could provide a decent support. Thus the rally will continue for the full year but there will be hiccups in the near future. Also, the risk is higher in buying at high prices. However, if investors are smart enough to exit from non-performing stocks quickly (by having a slightly short-term attitude), there could be a lot of money to be made. A good strategy would be to not jump in now but wait for lower levels. Here are some points that equity investors need to keep in mind before investing in Y2K.

Superior returns from equities
At a fundamental level, investors should stay invested in equities. But is it too late for the cream to have disappeared? Yes and no. The infotech sector seems priced at rich valuations for companies to deliver any expectation for March 2000 or even March 2001. So don't expect too many multibaggers here.

But the rally needs to get more widespread in cyclical and industrial stocks. Third quarter results will not be as important as Budget expectations though they could have an impact. But cyclicals (sectors such as petrochemicals, cement, engineering and automobiles) and banking have not really spread much and the scope for appreciation looks decent.

Fast moving consumer goods stocks have had a bad year and this is likely to be reversed to some extent. Some multinational pharmaceutical stocks are also; they too are expected to rise. Debt returns are unlikely to be impressive, as inflation has been under control for quite sometime and is expected to remain around the current levels unless some fiscal profligacy happens.

The IPO rush
There will be many more public issues this year, especially media and software companies. Investors should stay liquid for these issues in case they get lucky enough to get allotment. At best, it's a one-in-a-hundred chance. But if they get the shares, the returns can be stupendous considering that most of these companies are going to be really solid.

Last year's software initial public offers like Polaris, Kale Consultants and Hughes Software have given mindboggling. HCL Technologies and Television Eighteen are expected to list at a massive premium. IPOs of Sony Entertainment and New Delhi Television are expected soon. Also many public sector enterprises will be coming out with public issues.

The new economy is here.Many software and Internet companies that have been funded by angel investors and venture capitalists in the last year, are expected to tap the market. Many Indian companies are also ready for a listing in the US market: most on NASDAQ, and some on the New York Stock Exchange.

More mergers
The mergers and acquisitions boom has only begun in 1999 and it has a very long way to go. This year should result in further consolidation. While last year cement led the merger mania, this year the wave should spread to telecom, software, banking and auto ancillaries as well. It may make sense to identify and buy into good targets; or you could make decent returns from your current non-performers that start doing well.

Ballistic B Group
The B Group of companies listed in the BSE have given some fantastic returns in the last three months--deserved in some cases and manipulated in others. This is one section of the market where the investor can really make and lose huge money. So beware and be sure. Seismic shifts are actually taking place in many businesses and there definitely is a lot of money to be made. A lot of companies have changed their business focus from anything and everything to software or a new economy-related business. Some of them do appear promising and sincere. But be sure of the business and the management. Only the nimble-footed investor will make it here.

Mutual mania
A simpler solution for some retail investors is to participate in the rally through the mutual fund route. A lot of the funds have performed well and there is reason to assume that the savvy ones will continue to do so. Try some sector-specific funds too; the returns can be very satisfying. Money is flowing in this industry as is evident from the success of a number of public issues of mutual funds. In debt alternatives, bank deposits don't make much sense as the returns and liquidity in debt funds and money market mutual funds are better.

Internal changes
There are two major changes that will also make Indian companies more attractive for all investors. The first is internal restructuring and consolidation which is expected to improve valuation. Many companies have become more efficient and are also cleaning up their balance sheet.

The second is the increasing thrust on better management practices. Companies like Infosys have set a standard as far as disclosures are concerned.More companies are following this model.

While things seem generally rosy (except the current whimsical Sensex level), there are some caveats that can nix the rally

The foreign hand
The market is dependent to a large extent on foreign funds. If FII money doesn't flow in as expected in the next few days, the market could well see a correction. But in all probabilities, fund flow should be encouraging for the entire year. But if the market gets overheated in the next few days, they may well wait for a correction.

Corporate results and Budget 2000
The fourth quarter of 1999-2000 is a crucial period. Corporate results for third quarter will be important for sentiment. Results of cyclical companies will determine whether the economic recovery is being translated into performance. Second-rung software companies' results will be watched closely for signs of slowing growth. The 2000 budget will also be announced in this quarter and how the government plans to tackle the fiscal situation will have a bearing on the market. The spectre of petroleum price hike, ever looming, could also have an impact.

Operators
The market has an excessive number of dominant stock operators with a significant stake in several companies. The equity capital of many Indian companies, especially in the new economy industries of software and entertainment, are low. This makes them susceptible to manipulation. Operators also have huge outstanding positions in the badla market. They have been responsible in making and breaking stocks in the past and are in a much stronger position today having made money. What they do to individual stocks can have a bearing on the market. What SEBI and the government do to control them can also be crucial.

Global links
India is not a stand-alone economy anymore and a lot of the money invested in India is foreign. The software sector has seen linkages with the US stock markets, especially the high-tech stock exchange of NASDAQ. Any adverse developments there could well be translated in a re-rating of the bullish domestic infotech sector, and the overall market.

To sum up, this year will continue last year's bullishness and every investor should have an equity exposure, either through stocks or mutual funds. We are in a phase where business is changing everyday and the companies that make the most of the changes will bring returns to investors.

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