Investors had mixed fortunes in stocks

In the year 2010, it was certain that long-term investors in stocks may have gained relatively in terms of valuation but the stock markets in the country have been rattled by crisis one after the other through out the year. It was more so in the last two months, as people were always looking to exit at every opportunity.

In the calendar year (CY) 2010, the BSE Sensex gained 2516 points and NSE Nifty 1,012 points. On January 4, 2010, the Sensex was at 17,558 which reached 20,074 on December 24, 2010. The Nifty on the other hand, began the year at 5,000 and closed at 6,012 on December 24, 2010. Analysis shows that there were signs of revival in other indices too. The BSE Midcap index and the BSE Smallcap index grew by 14 per cent and 12 per cent respectively, in 2010.

The year began with the bourses advancing stock trading hours by an hour at 0900 hours to integrate with other overseas markets. Unlike in the previous year, where one feared a complete collapse, 2010 was not that grey as the financial systems had stabilised and for a investor, it was more of a call of where the valuations are versus what the data (on earnings) will come through vis-a-vis the government move on withdrawal of stimulus.

In terms of market valuation, the market capitalisation (market cap) of the BSE Sensex grew by Rs 3.88 lakh crore from Rs 26.47 lakh crore (as on Dec-end 2009) to Rs 30.35 lakh crore as on December 24, 2010. BSE smallcap index surged to Rs 3.32 lakh crore from Rs 2.96 lakh crore while the valuation of midcap firms grew by Rs 1.27 lakh crore to Rs 10.66 lakh crore from Rs 9.39 lakh crore.

The journey

A look at the accompanying chart shows that Sensex and Nifty did not have much of surprises till about September this year. Stocks saw many ups and downs but the indices were mostly range bound and moved sidewise. It was mainly a consolidation phase as Sensex moved between the 17,000 and 18,000 range. But in October stock markets suddenly flared up as Sensex surged to 20,000 and Nifty 6,000. Thereafter, they have aging remained range bound.  Indices reached their peaks during the year in November around the Diwali time when Sensex and Nifty closed at 21,108 and 6,348 points, respectively. When the year, began it was expected that corporate investments would surge hugely in 2010 due to strong GDP growth which will enhance capacity utilisation. The year saw a record fund raising figure of Rs 71,114 crore, by both PSUs and private companies, through 62 IPOs and 8 FPOs (follow on public issues).

Party spoilers

Divestment of PSU shares, including the share issues of Coal India and MOIL, in the year collected Rs 49,946 crore, which was more than double of Rs 21,168 crore raised by private sector companies. However, fund-raising from the international market via FCCBs, ADRs and GDRs, was somewhat subdued in comparison to the previous year. Foreign investors were also bullish on India as FIIs (Foreign Institutional Investors) pumped in a record Rs 1,29,857 crore (till December 23, 2010) in Indian equities. In dollar terms, the net equity inflow from FIIs in 2010 stands at $28.60 billion as compared to last year’s $17.45 billion.

These positives, however, faded away to some extent towards the end of the year. The conflict between two Korean nations and then the bribe-for-loan scam involving banks were the reasons that took away much of the sheen. The 2G spectrum scam was also another spoiler that stalled the entire winter session of the Parliament with opposition political parties demanding JPC probe. Prior to that, there were charges of fraud against Goldman Sachs and S&P rating downgrades on Greece and Portugal that dampened investor sentiment and pulled down bourses across the world including India. As the FIIs turned net sellers (as opposed to net buyers) stock indices moved erratically. No doubt, scams and scandals make FIIs less confident about transparency and the governance in the system. They are also concerned over the India’s twin deficit in budget and current account as compared to most Asian nations who have a current account surplus but they have a budget deficit which tends to be smaller. Macroeconomic worries caused by a surge in global crude oil always impacted bourses significantly. Now that the global crude oil price has gone above $90 a barrel level — for the first time in 26 months - it is definitely causing a concern.

At the current price levels, the three oil-PSUs viz Indian Oil, Hindustan Petroleum and Bharat Petroleum are projected to lose Rs 68,361 crore (as they sell diesel, domestic LPG and kerosene below cost to keep inflation in check) in the current fiscal year that ends in March 2011.  Obviously, these shares won’t see any rise in valuations till the crude prices come down. Notwithstanding the negatives, the retail segment saw some positive in the year as the market regulator Sebi hiked the maximum limit for investing in IPOs to Rs 2 lakh against the earlier limit of Rs 1 lakh. Bolstered by near 9 per cent growth in gross domestic product (GDP) growth in 2010 and lower dependence on exports, Indian economy was to some extent insulated from the world financial disturbances.

Though high inflation rates in the country is an issue, owing to good monsoon the food inflation is expected to moderate to around 6 per cent in a month or so. Robust tax collections and funds from 3G spectrum have significantly filled in the government’s coffers and deficits are manageable. Growing industrial production and an encouraging investment momentum are the other factors that may help make investors invest in stocks.

Normally, smallcap and midcap stocks yield relatively good returns on robust performance but towards the end of 2010 these segments were hit by all sorts of negative news. Companies like LIC Housing Finance, Money Matters Financial Services, Indian Bank to mention a few, got a severe drubbing from the bribe-to-loan scam, while the news of stock price rigging hit smaller firms like IRB Infrastructure, Karaturi Global, K S Oils. 

Also, scrips of various realty players like Unitech and consumer durables maker Videocon  suffered too as they figured in the CAG report for various discrepancies in their 2G spectrum licence applications. 

“Until November, the smallcap and midcap stocks were giving fairly good returns to the investors. But a slew of scams and stocks rigging issues hitting the sector badly which made wary investors booking profits to thwart losses...,” said Geojit BNP Paribas Research Head Alex Matthews. 

But market experts now expect another spur in FIIs funds inflow in the coming months. The recent increase in advance tax payment by top 100 corporate taxpayers by 19 per cent also indicates better corporate performance in the third quarter (September-December), thus giving an indication of better performance by the industry in the months to come. Undoubtedly, the India growth story has remained intact and people would know that there is always money to be made from stocks in a fast developing economy. There is no reason to be pessimistic about 2011.