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BW Businessworld

Risk Is Back In Equities

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Perhaps by a whisker, but the BW Expert and Dartboard indices beat the Nifty 50 Index by half a percentage point each in February. The NSE's Nifty 50 itself ended 3.5 per cent higher at the end of February over January, with the two BW indices bettering that.

Compare that to end-January, when the Nifty beat both the BW indices by 3.6 per cent and 4 per cent, respectively. But for the two months, the BW Expert Index and the Dartboard Index are up 13 per cent each, both below the Nifty, which bettered its end-December number by 16.5 per cent.

Prateek Agrawal, CIO at ASK Investment Managers who overseas Rs 1,500 crore of domestic and offshore money is unimpressed by the the sharp rise in the Indian equity market. In fact, from a cash position of 11 per cent in January, today Agrawal is nearly fully invested. In the past two months, Agrawal has exited counters like Hindustan Unilever and has included three new stocks – Hindalco, Larsen & Toubro and Siemens in his portfolio. Says Agrawal: "Risk is back into equities and therefore we have got into some high beta stocks." In the past two months the beta of his portfolio has jumped to 1 from 0.7. You can't blame him for his aggressiveness, after all India is among the top four gainers in the MSCI Emerging Market Index gaining nearly 27 per cent in the first two months of 2012.

The rebalancing of portfolio by fund managers have paid off, outperforming the benchmark in February. The flow of money into mid and small cap stocks has seen the BW Expert Index and the BW Dartboard Index—which are more of a multi-cap index—gaining over 4 per cent each, outperforming the board-based National stock Exchange's CNX Nifty Fifty Index by half a per cent. The Nifty ended the month with a gain of 3.5 per cent. The flow of money into mid and small cap stocks in February helps explain the performance of the BW Expert and BW Dartboard indices — they are multi-cap indices, compared to the big-cap Nifty 50. The scenario was entirely the reverse in January when the Nifty outperformed the BW Expert and BW Dart Board Index as money came mostly into large-cap stocks. However in the two months, the Nifty still outperforms the BW Expert Index and BW Dart Board Index. (See graph: BW Index)

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"It's a liquidity driven market with money chasing assets. It's a global phenomenon and nothing unique to India. The current rally has nothing to do with fundamentals," says Agrawal who feels that, "Cheap valuation are helping fund managers to take the extra risk that don't want to miss out on the ongoing momentum by making some moolah." According to EPFR, a US-based agency that provide fund flows and asset allocation data to financial institution reported that year to date till 22 February 2012, mutual funds (US-based) have invested over $20 billion dollars into markets, primarily emerging markets. The biggest buying was in markets such as China, Brazil and India, while selling was in countries like France, Japan and Germany. (See graph: Inflow Outflow).

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Meanwhile of the 28 stocks listed on the BW Expert Index, 9 stocks, accounting for 41 per cent of the index weightage, underperforming the Nifty with four stocks — Cipla, EID Parry, Bharti Airtel and Larsen & Toubro recorded negative returns in the range of 0.2 per cent to 9.5 per cent in February. While Bharat Electronics, Oberoi Realty, Jain Irrigation, Bajaj Auto, Cummins India and State Bank of India were the biggest gainers among the BW Expert Index that gained 9 per cent to 15.1 per cent during the month. (See graph: Winners and Losers).

For February, CJ George's picks that has been the part of the seven experts and one institution - Axis Direct that constitutes the BW Expert Index recorded the biggest gain of nearly 9 per cent, though the weightage of his picks to the overall BW Expert Index was 17 per cent. This was followed by Axis Direct that registered a gain of nearly 8 per cent and his weightage to the overall Index has been 31.5 per cent. (See graph:  Stock Pick).

On the other hand in the BW Dart Board Index, 11 of the 31 stocks that underperformed in February included the likes of Hindustan Copper, Reliance Industries, Hindustan Unilever, Dr Reddy's Labs and Apollo Hospitals. Stocks like Lanco Infratech, Indiabulls Financial Services, Unitech and Jet Airways were the top gainers in the pack of BW Dart Board Index.

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Though the worst fears are possibly behind us in 2011, the big question among investors are where is the market heading from here on? Says Nilesh Shah, director, Axis Direct, "The flows will keep the mood positive in the market. However before the budget a correction which is inevitable will be healthy for our market, I don't see the Sensex slipping below 17,000."

Adds Agrawal of ASK Investment Managers, "From here on markets would now depend on reforms, interest rate cuts and capital inflows. Though near term positive is the continuing flow of money from FIIs, the near-term uncertainties of Iran (rise in oil price) can't be ignored, which can also spoil the party."

Meanwhile, the Samajwadi Party (SP) winning a clear majority in Uttar Pradesh sprung a negative surprise in the market . Market expectations were that SP would form the government with support from the Congress. Given Congress' weak showing, market is expecting the government to get more cautious that would offer more sops, and would move further away from reforms. In such a scenario, in March, investors are likely to become more discerning over the quality of the stocks they acquire given that the market has rallied too fast in the past two months.