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BW Businessworld

On A Losing Streak

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For the past few days, Gopal Agrawal, chief investment officer at Mirae Asset has been reducing his funds' exposure to commodity and capital goods stocks and getting into defensive sectors such as pharmaceuticals, auto and auto ancillaries. The reason: weak Indian markets, with no positive triggers.

Just think: four months ago — in January — Agrawal was readjusting his portfolio by buying  stocks in the very sectors he is selling today. Back then it was perceived that risk appetite had returned after capital inflows from foreign institutional investors (FIIs) seemed to resume.

"The current weakness is a result of policy paralysis and stubborn inflation," says Ritesh Jain, head investments at Canara Robeco Mutual Fund, stating the obvious. "A depreciating rupee is adding fuel to the fire." Agrawal agrees. "India is not aligned to Greece," he says. "It's our own domestic issues that are dragging the market down and this inaction is expected to continue till the presidential election."On 11 May, the Bombay Stock Exchange (BSE) 30-share Sensitive Index (Sensex) closed at 16292, down 127 points. The barometer index has lost all its gains since the beginning of the year, and nearly 6 per cent since 2 May. Contrast this with the 21 per cent rise in the Sensex between 2 January 2012 and 22 February, when the index touched 18523 points.

But a disappointing FY2013 Union Budget and the more recent policy flipflops over the general anti-avoidance rules (GAAR) have spooked the FIIs (the mainstay of the market). "GAAR has only increased confusion in an already hostile investment climate," says Jain. "Had GAAR been introduced when the economy and markets were doing well it would not have hit sentiment that badly."


6% The decline in the Sensex since 2 May 2012

And it's not just GAAR. One analyst with a leading brokerage firm points to the Vodafone tax case, and the tax department's pursuit of the company despite the Supreme Court having thrown out the government's case. "The government seems hell-bent on getting that money out of Vodafone," he says, requesting anonymity. "That sends a bad signal to potential investors in India."

Others point to the outlook for corporate earnings, which doesn't look too good. "You can say that the market will oscillate within a narrow range," says Jain. "It still is a stock-picker's market." 

So what are fund managers doing? "We just cannot sit on cash; we do not have that mandate," says Agrawal. "We are investing in stocks that generate free cash flows and have a strong return on investment and return on equity."

The consensus, though, is that market sentiment is poor and the Sensex will drift downward, but it may not go down in a hurry. 

(This story was issued in the magazine dated  21 may 2012.)