Another year has drawn to a close and, much like the previous three, it has been a blow-out year for investors. Having used up every conceivable superlative to describe the market movement of the earlier three years, trying to do so this time around would be an exercise in repetition. Investors in large-cap stocks have reason to be happy, as both the Sensex and the Nifty recorded returns of more than 40 per cent over the year.
In a sense, the performance of the equity market in 2006 is both strikingly similar and sharply different to its showing in 2005, on two key counts. The rally in the year just ended belonged to large-cap stocks, as was the case the earlier year; in contrast, the returns have been accompanied by significantly higher volatility year-on-year.
But 2006 will definitely score high in terms of thrills and spills. While it did prove exciting for those on the sidelines to watch the market action unfold, the same cannot be said for investors holding the wrong kind of stocks. In the first four months of the calendar, the indices moved up inexorably on the back of strong liquidity and a solid performance form India Inc; but what happened over the next two months would have been difficult for even a Nostradamus to predict.
In May and June, the market went into a free fall, shedding close to 40 per cent and raising fears that the bears — who have taken a mauling over the past four years — would finally have their moment in the sun. But that was not to be. The market staged a remarkable recovery, as dramatic as the fall, seemingly effortlessly soaring past earlier highs, with the Sensex and the Nifty crossing the magical milestones of 14000 and 4000 respectively.
FII FLOWS
Foreign institutional investors have been the key catalysts of the market since they went bullish on India from mid-2003. Admittedly, FII flows in 2006, at about $8.5 billion (around Rs 38,000 crore), were lower by 20 per cent than in 2005. But this was due to the markets tanking in May and June. But for this, the inflows would have been much higher and the market would perhaps have ended on a stronger note.
The buttressing effect of FII liquidity apart, the market also underwent significant re-rating on the price-earnings front. Now, the Sensex trades at about 20 times expected earnings for FY07 — significantly higher than a couple of years ago.
Seen in isolation, the P-E multiple might seem stretched; but viewed against the stellar growth in earnings over the past three years, coupled with a high return on equity, that multiple becomes quite justifiable.
Even as the market scaled new peaks, reports from leading brokerages flew thick and fast that the indices were overvalued and a case was being made out for a steep correction. Did the diffidence of these proponents of gloom do anything to impede the bull stampede? Not a chance. With a mind of its own, the market simply continued its relentless upward march.
MUTUAL FUND FLOWS
Obviously not wanting to miss the party, mutual funds, too, were busy raising serious money. As of end November, net inflows into equity funds, at Rs 32,000 crore, outpaced by 40 per cent the receipts in the corresponding previous period.
The jump in inflows was propelled in no small measure by a sharp rise in the allocation of household savings to funds.
With marquee names such as JP Morgan, Dawnay Day and Credit Suisse announcing their intent to enter the fund management business, this space promises interesting times in the year ahead.
INITIAL PUBLIC OFFERINGS
Though over 70 companies went to the market in 2006 to raise funds (about 40 per cent more than in 2005), the number of issues that disappointed investors outstripped those which hit pay-dirt. In the latter category were Educomp Solutions and Atlanta (both multi-baggers), Tech Mahindra, Parsvanath Developers, Info Edge and DCB; on the flip side, several issues, notably that of low-cost pioneer Air Deccan and of a clutch of other mid- and small-cap outfits, dashed investor expectations.
As a consequence, scepticism about IPOs was distinctly manifest towards the year end, when even an issue such as Cairn Energy was under-subscribed by retail investors. One can expect a clutch of offers in the year ahead too, led by the big boy in the real estate space, DLF.
SECTOR PERFORMANCE
It is quite amazing how quickly investor perception of a sector can change in just one year. Sugar, for instance.
Last year, it was basking in the glory of high prices, which led to every sugar company being marked up sharply, the way tech stocks were in 2000.
At the end of 2006, however, sugar stocks had lost flavour as falling prices left a bitter aftertaste, with stocks trading at 30-50 per cent of their yearly highs.
At the other end of the spectrum is cement, a commodity that well and truly rocked in 2006.
With demand growing briskly enough to outpace supply — on account of the boom in housing and infrastructure — and leading to higher prices, 2006 will go down as a watershed year for cement manufacturers.
With capacity addition still some time away, we expect to see continuing strength in stocks from this sector.
Other sectors that had a good outing in 2006 include alcoholic beverages, capital goods/engineering, infrastructure/construction and real-estate, and select stocks from the telecom, media and the IT pack.
Pharma, ferrous metals, FMCG, oil and gas, and auto components did not have much to write home about in 2006, though there was still money to be made if one were to stick to a disciplined, bottom-up stock-picking approach.
Sectors that are likely to be out-performers in the year ahead are outlined in the accompanying story below. Also presented is the technical analyst's view on what the charts portend for 2007.
VANISHING ACT OF PENNIES
We will round off with a facet of the market that is featured here because it is conspicuous by its absence. In earlier years, investors' dalliance with penny stocks was a recurring theme despite warnings against such a bias.
Unheard-of stocks with dubious businesses were punting favourites for hordes of investors, who were lured by their low absolute price and the prospects of making a quick buck.
Several such stocks acquired a veneer of respectability by posting manifold gains; in 2006, the tide turned and quite a few stocks slipped into the penny category.
With this, investor bullishness turned into apathy and that meant fade-out time for such stocks. Year 2006 will thus also go down in history as one in which the penny dropped!