Big Bullies Take a Cue

Equities ended the year with the distinction of being the best among all assets. The new year could be little tough for investors partly due to the base effect. Given this, the best way to beat the market volatility is to bet on sectors and stocks that have been out of favour this year

    AFTER getting bad press for more than a year-and-half, equity as an asset class made a strong recovery in 2009. The year had started on a bad note with the talk of a greater and extended pain for equity investors. The bearish sentiment was quite strong in developed world with the talk about an L-shaped recovery, which basically meant that the stock market might not go any where in the foreseeable future. 
    But when has the equity markets followed the script. If in late 2007 and early 2008 they put bulls on the mat, this time bears looked foolish as all major global indices began an upward move beginning the first week of March '09 and in a matter of three months, many indices were up by 50%-60%. So instead of a much-feared Lshaped recovery, the world got a V-shaped rebound. 
    But there was a subtle difference in the nature of the recovery. While in the past, all major recoveries were led by the stock markets in the developed markets, in 2009, emerging markets played the leadership role. In comparison, Dow Jones and its counterparts in Europe and Japan went along with flow without coming close to taking over the control. This is very significant development because in the past, while emerging markets out-performed Dow Jones in times of global boom, they under-performed, the developed markets during bear-runs. It's probably for the first time in history, that emerging markets, equities especially, China and India have beaten Dow Jones during both the bull-run and the bear-run. This may set the tone for the global equity markets in 2010 as well. 
    India and China were among those few countries that remained resilient in the face of one of the worst global economic recession in decades. Both the economies are expected to clock more than 7% growth in GDP this year. Equity market, which is supposed to reflect the events in the real economy, seems to have taken cognizance of this. Nifty, the 50-stock based broader equity index, reported a gain of around 70%, in line with Shanghai Composite Index, in calendar year 2009. This kind of return is far superior to 21% and 19% return seen in case of S&P 500 and FTSE 100, respectively. 
    Currently, there are no danger signs on the horizon that could derail Indian economy in the near term. Consumer confidence, geo-political stability and benign monetary environment and a resurgence of risk appetite among investors; all indicators are supporting growth. The corporate earnings for next two quarters will have record growth due to lower-base effect. The global economies, mainly United States, have been showing signs of recovery since the past few months. Most of the market pundits are of the view that 2010 will bring growth to the US economy, albeit at a slower pace. It means equity market in the US will also move northward and there will be no unnecessary pressure on fund managers sitting in the US to liquidate their portfolio in places like India. As a result of these factors, Indian equity market is surely going to touch all time highs in calendar year 2010. 
    But what sectors or group of stocks could lead the markets to a new high in 2010? That is a tough call to make given the developments in 2009. In the last quarter of FY10, the benchmark indices almost remained static, moving up by 5% since the beginning of October. But the individual stocks were, however, far from being static as our story on Page-2 shows. In fact, just as Nifty was struggling to break through from the resistance level of 5100-5200, many index stocks such as Tata Motors, Mahindra & Mahindra, Cipla, TCS, Infosys Technologies, Asian Paints, Nestle and Bajaj Auto, among others made all time highs in last three months. The surge in the mid- and small-cap space was even more dramatic. Most of the stocks in this group have beaten the Sensex hands down this year as is visible from the table below. Rise of the Smalland Big-caps 
For instance, BSE Mid-cap index is up 108% in 2009 while BSE Small-cap index appreciated by 126% in the last 12 months. The rise in individual scrips was even more dramatic with many of the stocks tripling or quadrupling in value in 2009. What was most surprising was that small- and mid-cap counters saw the sharpest rise just when the benchmark indices seemed going nowhere. 
    The year also witnessed a strong surge in value investing. All through this long bull-run which began in 2003, frontline stocks were at the forefront even if they were expensive. In contrast, lesser known companies, though in sound financial state, were cheaply valued and always played a second fiddle to their bigger peers. Last year, however, the tables were turned upside down. Right now there is a frantic search on the Dalal Street for the next big investment idea in the small-cap. 
    What does this mean for equity investors? The lessons are clear. An alert and unorthodox investor can make money even in a static looking market. You just have to be alert to the changing fortunes of various sectors or groups of stocks in the market. And don't be fearful of going against the market consensus. In 2009, Tata Motors, Hindalco, M&M, Sterlite and TCS were the biggest gainers in 2009 among index stocks. One year back, these were some of the most battered stocks in the market. Such a dramatic turnaround is not uncommon in equity markets and offers the best chance for investors to juice-up their returns. Though most frontline stocks look expensive, there are still large pockets of value in sectors such as cement, PSUs banks, auto components and power sector among others, which are currently out of favour. And yes don't forget to harvest returns from your equity garden once in while —it not only keeps your cash flows in good shape but also keeps the garden in good shape.