Market Leadership – The Elusive Hunt

Indian fund managers are a tired lot. They waited out 2010 for the elusive correction and finally got one in 2011. The year has only seen sliding indices , political scams , fleeing investors and floundering companies. Reputations have taken a serious knock in 2011. Nobody has been spared and Fund managers are now trying to find safe havens among companies where they can bottom fish in these troubles times. This is in sharp contrast to the long periods of time when fund managers had several top rung stocks which they could always buy on market falls. If the fund managers are perplexed, the investors seem to be losing faith by the day.

The fallibility of big corporate groups , top blue chip companies and favoured sectors is the story of 2011.

let us begin right at the top. RIL , our index bellwether suddenly looks wobbly and unsure of finding more gas ; it has made a big bet on telecom in a difficult policy environment ; it has not reworked its retail business ; Its overseas foray into shale gas has hit a wall with its partner selling its stake to Chevron without even informing RIL. Last , but not the least is the threat of getting drawn into controversies due to random events like telephone taps and more things unknown to us. Somehow , the markets have little love for the bellwether as the Reliance aura blurs.

The ADAG group which was the stock darling of 2007-08 has fallen into troubled times. The twin troubles of accumulated debt and accounting debacles haunt the company and investor confidence has got silently smashed . Their reputation has been damaged almost terminally even though there was no concerted effort to hurt it by anyone. Investors simply showed remarkably maturity in steering clear of a troubled group.

The Radia tapes took a great deal of sheen off the Tata group as well. The fact that the frontline media downplayed the contents did not help much and the shares of almost every single group company has taken a hard knock. The credibility of the group will take a long while to be restored.

The Vedanta group did not find the `environment’ favorable either. While the Niyamgiri controversy put them on the wrong side of the most powerful in the country , they doubled their troubles by buying Cairn India. This did not go down well with the established groups or the concerned ministry and the deal is hanging in mid-air.

The indifference to different sectors has not helped matter either. The sectoral aversion witnessed in infrastructure is unprecedented. If you recall that in 2007-08 , there was a rush to get a piece of action in the infrastructure space and every mutual fund launched successful infra schemes that collected big bucks. For those left with memories of that euphoria, the current aversion is a shift to the other extreme . The number sectors going out of favour is increasing as cement , telecom and to a limited extent banking sectors get added to the list of sectors.

In this scenario, the market is unsure of which sector will lead a comeback in stock indices and provide a strong leadership to the indices. In is unlikely that the run up to the budget will provide a decisive trend or reversal of sentiment.

Investors must bear in kind that the budget always leads to a review of investor sentiment and market leadership will emerge only after clarity emerges in the budget. This year we may well see the slow emergence of market leadership and investors must keep a close watch on the composition of the indices. The exchanges will be forced to revamp the indices and introduce some large PSU’s like NMDC and Coal India. The drop-outs could well be some companies that lorded over the markets in the boom of 2008 and are languishing today. Market leadership will decisively gain momentum after the indices are restructured.

it is suggested that investors take a contrarian view of this situation and invest in companies which are clean, well-managed , continue to grow at a steady pace and are not a part of the Indices. The Mid cap space offers ample opportunities to stock pickers. Happy investing.

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