The Hindu Business Line : Bulls, `charged' for 2006 — Pockets of out-performers likely

THE equity market in 2005 has seen a dream run, but the equity experts we talked to are unanimous that this will be impossible to repeat. While they are all bullish on the Indian economy and say that continuing FII inflow and increased retail participation will keep the market firm, one major concern is high volatility, which has the danger of swamping out traders and investors with a short-term outlook.

Their investment mantra for 2006: Iinvest in quality, have a long or reasonable time horizon and fight the temptation to invest in penny stocks to make quick gains. Here is what our experts have to say:

Sandeep Shenoy, Strategist, Pioneer Intermediaries

Economy outlook: There is no reason to expect the economy to falter in the coming quarters. Despite soft tax collections, off-take in consumer durables, electronics, automobiles and housing is brisk. Exports from the chemical, auto ancillary and engineering sectors should give a fillip to the economy. Garments and apparel, and mining and minerals would benefit from global buoyancy in iron ore and non-ferrous metal/ores and changing global textile sourcing patterns.

Equity outlook: The unbridled bull run of 2005 will be impossible to replicate, but there will be strong pockets of out-performance. Investors should be happy with 12-per cent returns in the indices. But with the markets in the `high expectation' zone, blips in earnings could have a punishing effect on the market. So the investment strategy should be tailored to ride over such earnings blips.

FII interest: On an absolute basis we might have rallied substantially in the last 6 quarters, but on a comparative basis, India is still attractive for most FIIs. The global money flow dynamics will prevail and India could receive an increasing chunk of emerging markets inflows.

Also, mainline global fundscould find some of the heavyweights difficult to ignore, especially when viewed in the backdrop of our huge consumption class, rising affluence and affordability and changing consumption patterns. Sectors such as petrochemical and oil, auto, lifestyle, aviation, telecom and logistics could see significant FDI and FII inflows.

Retail participation: One hopes for increased direct/indirect retail participation, but the changing dynamics and volatility may ensure that most of them — including traders — will have a tough path ahead. The sheer money muscle of large FIIs will ensure a surge in the heavyweights to propel the indices; as retail participation in such counters is minimum, they normally enter suspect-grade low priced stocks, where the pitfalls are huge. One hopes this does not happen in 2006.

Favoured sectors: Oil and petrochemicals, auto, metals especially non-ferrous metal stocks, cotton-based spinning and finished textiles companies, and sugar, especially south-based companies.

Best picks: The PSU oil stable seem to be the best contrarian bet. I'd choose IOC followed by BPCL. Sterlite/Hindalco are my best bets in the non-ferrous metals though Hindustan Zinc could pip them to the post. In auto I would choose Tata Motors or M&. GHCL or Tata Chemicals in the chemical sector, and in sugar, KCP Sugar or DCM Shriram Consolidated.

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