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Wednesday, Jan 28, 2004

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Tenth Anniversary Special - Stock Markets

Secondary market: Up from the downs

S. Vaidya Nathan

INFOSYS, HDFC, Grasim, State Bank of India, Hero Honda, MICO, Sundram Fasteners, Hindalco, Container Corporation and Dr Reddy's Labs — ten stocks that would deliver handsome returns, adjusted for risk. After investing in the above, you could wake up from a deep slumber after ten years, without a crease of worry on your forehead; your bank balance would have risen manifold to see you through the rest of your life comfortably.

Yes, you would have missed the excitement of the bull market of 1994, 1999-2000 and 2003, the primary market excesses of the mid-1990s that triggered a crash in late 1994 and the tech sector meltdown in 2000. That foreign institutional investors (FIIs) have poured in more than $21 billion over a ten-year period, a record $7.5 billion in 2003, and have also become big-time traders, would be news to you. So would the emergence of big-time day trading by other investors.

The name of Ketan Parekh, who masterminded the bull market of 1999 and early 2000 by liberally channelling funds from the banking system and overseas corporate bodies into equities, would not ring a bell. You would have no reason to fret over the protracted periods of sluggish or declining markets, which would have covered about 80 per cent of the ten-year period. The following changes would have bypassed you and some of them may be a pleasant surprise:

  • There are no share certificates on paper; you have to buy and sell in an electronic mode; settlement is completed two days after the trading day; you could also be sure that your trade has been executed and reported at the stated price; brokerage costs have come down by at least 1.5 percentage points; you could also buy and sell stocks from anywhere in India; sale proceeds would be credited to your bank account in a jiffy without having to wait for weeks on end as was the case a few years ago.

  • Barring the National Stock Exchange and the Bombay Stock Exchange, the other 23 just make up the numbers. The Securities and Exchange Board of India has put in place an elaborate regulatory framework that has brought about order in an otherwise chaotic market. Badla has given way to derivatives. So much for the systemic part.

  • The big story is the rise of information technology stocks; given the kind of returns that they have notched, even the meltdown of 2000 appears a blip that represented a correction of unwarranted exuberance. That the Wipro's market cap swept past the Rs 2,00,000-crore mark, enjoyed a brief honeymoon at those levels and is, now, at about Rs 40,000 crore. That still represents a manifold rise over what it commanded in 1994. As is usual with any bull market, a horde of pretenders presented themselves as IT-sector investment opportunities, only to vanish into thin air by late 2000. But Infosys, Wipro, Hughes, i-flex solutions and HCL Technologies, to name a few, provide quality exposures to the IT opportunity.

  • Stocks of multinational corporations (MNCs) are no longer coveted or valued at stiff premia compared to Indian companies; the only exceptions may be a few pharma and engineering MNC plays such as GlaxoSmithKline, Pfizer, ABB and Siemens. A host of them also opted to delist, as their global parents stepped up their stake to over 90 per cent. .

  • Stocks of public sector undertakings have a domineering presence. ONGC, Indian Oil, BHEL, BPCL, HPCL, Bharat Electronics, GAIL and Bharat Earth Movers are much sought-after. Fundamental strengths and potential gains linked to disinvestment have made them an integral part of most portfolios.

    But the basics of investing remain unchanged. If you select stocks carefully, you could do a Rip Van Winkle again and stash away returns. However, the returns would not be as impressive as it was for the portfolio of your stocks over the past ten years. A more active approach may pay richer dividends. You could now also leave that job to mutual fund houses; ten funds that make the cut on track record are Franklin Bluechip, Franklin Prima, HDFC Equity, HDFC Prudence, UTI Petro Fund, Alliance Basic Industries, Alliance Capital Tax Relief, HDFC TaxSaver, UTI Master Value Unit Plan and Templeton India Growth.

    But for investors who enjoy the thrills of day-to-day trading and can also afford the higher risks of direct investing in stocks, the scope today is far greater than what it used to be. Contemporary trading systems have made the job easier and faster. As Internet-based trading gathers steam, the pace will only pick up.

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