Stock market in 2000 -- Bears have the last laugh

B. Krishnakumar

THE YEAR 2000 will go down as one of the most eventful in Indian stock market history.

Following a rising trend since November 1998, the market peaked in February 2000, but has since been through a major bearish phase. The mad rush for technology, media and telecom (TMT) stocks, witnessed in late 1999, spilled over to the next year too. The meteoric rise in TMT stocks that began late last year, peaked in early 2000. But the subsequent meltdown was equally dramatic.

After touching an all-time high of 6,151 points in February, the benchmark BSE Sensex has been on a downtrend, declining over 30 per cent from that peak. The collapse was not confined to the local market; quite a few global markets also witnessed a similar trend. In the US, for instance, the tech-laced NASDAQ Composite Index declined from the March-peak of 5133 points to the current level of around 2500, representing a 50 per cent fall from its peak.

Ironically, the New Economy, or TMT, stocks -- the driving force behind the 1999 rally -- were instrumental in the market collapse. While the list of top gainers in 1999 was dominated by technology stocks, the list of losers in 2000 too has a fair tech weightage.

Familiar story

The dramatic rise and the final anti-climax in the new economy stocks is quite similar to the earlier euphoria and subsequent disenchantment with NBFC stocks of the mid-1990s. In 1995 and 1996, the stock market saw the mushrooming of quite a few NBFCs. Almost all their share prices, irrespective of the fundamentals, were on a firm uptrend. This NBFC saga ended with a shake-out in the industry. In the process, the valuation of fundamentally sound companies was also affected. And the share prices of the battered NBFCs are yet to recover from the earlier shock.

The recent downfall in the TMT sector is quite similar to the meltdown in the NBFCs. After a sharp rise in the prices of almost all tech stocks, the valuation of all companies have been pushed to lower levels. Top-rung stocks such as Infosys, Satyam and Wipro are now traded at levels that represent a decline of over 50 per cent from their respective peak value recorded in early 2000.

The collapse of the dotcom outfits and the spate of profit warnings issued by technology companies in the US have affected the sentiment towards technology stocks worldwide. Viewed in the backdrop of the global wariness of technology stocks, it is not surprising to the find the list of majors losers in the domestic market includes a fair share of software and technology companies.

Exaggerated price swings

As has been demonstrated in the past, the stock market appears to over-react to developments. While the earlier rally in tech stocks was overdone, so was the recent battering. After adorning the top slot among the list of gainers in 1999, Sonata Software, Mastek, Digital, NIIT and PSI Data Systems were among the top losers of 2000.

After touching all-time high in the earlier part of the year, quite a few software stocks have subsided to new yearly lows. Irrespective of the underlying fundamentals or near-term growth prospects, the tech, media and telecom sector stocks were hammered to lower levels. Infosys Technologies, for instance, declined about 30 per cent over the year.

Though quite a few stocks were pushed to lower levels, there appears to be a gradual shift towards quality. This is evident from the lower decline posted by fundamentally sound companies such as Infosys, Satyam and Wipro, in comparison to second-rung stocks such as PSI Data Systems, Digital Equipment, Zee Telefilms and Aftek Infosys.

Click here for Table

Opportunity zone

The chanelling of investible surplus (by small investors) into mutual funds propelled the stock prices of quite a few companies to higher levels in 1999. The sharp price rise in new economy stocks prompted mutual funds to turn overweight on the TMT sector.

The recent valuation slide and the increase in redemption of monies invested in mutual funds resulted in fund managers liquidating holdings in the tech sector. This accentuated the rate of decline in tech stocks during 2000. Though the mutual funds trimmed their exposure to technology sector, the new economy stocks still occupy a significant proportion in the equity portfolio.

The recent carnage could, however, be viewed as an opportunity for long-term investors to pick up exposures in fundamentally sound technology stocks. Infosys Technologies, Wipro, NIIT and HCL Technologies would readily graduate to portfolio candidate status. Hughes Software could also be a long-term winner but its presence in the software product segment lends a higher degree of business risk.

Small investors would be better off taking equity exposure through the mutual fund route. Though the returns could turn out to be relatively muted, the associated risk level is also lower. Moreover, by investing through mutual funds, small investors can also avoid the worry of going through a turbulent market phase. Given that the mutual funds have far greater access to information than small investors, it makes sense for investors to take exposures in the former.

Click here for Table

Media stocks not spared

While technology stocks were badly bruised at the end of the year, media and telecom stocks were not spared either. After a sharp rise the previous year, Zee Telefilms, PentaMedia Graphics, Global Tele-Systems, Crest Communications and Krone Communications found themselves in list of major losers of 2000.

With the performance not justifying the earlier price run-up, the valuations of these companies were affected during the year. Of the lot, Krone Communications and Framatome OEN Connectors deserve a second look from an investment perspective. Both have a presence in the telecom products and accessories segment. Their performance in the recent quarters has been fairly impressive. Fresh exposures may be contemplated in these stocks after reviewing the performance over the next two quarters.

Primary market turns active

After the NBFC episode, activity in the primary market waned, but the craze for new economy stocks led to a revival. However, like the NBFC saga, the revival resulted in a sharp rise in public offerings from start-ups and companies with shaky fundamentals.

During 2000, more primary offerings hit the market than in the preceding four years. Most of them were tech and media companies without a track record, and were rightly ignored by the market. However, quite a few companies with track records of sorts also tapped the primary market during 2000. These included Tips Industries, Balaji Telefilms, Akash Optifibre and Mukta Arts.

Considering the uncertain growth prospects of these companies, investors could steer clear of these stocks for the time being. Evidence of a sustained growth in earnings could be used to pick up exposures in these stocks.