A year of falling returns, shaky markets

With stocks yet to show any appreciation, the primary new issue market remained in doldrums. Gold, the only shining star among investment avenues, shot up by over 21 per cent during the year — thanks mainly to a hike in international prices due to US sabre rattling with Iraq. Small investors are disillusioned with the secondary market. In short, stock markets today are virtually out of bounds for the ordinary investor. Though mutual funds have collected a huge amount, they have no alternative but to reflect the condition in the market. Here is a brief history of what happened to your money in 2002:

GOLD: The yellow metal has been a good performer during 2002. The rising global prices pushed up the rates in India as well. A major reason for the rising gold prices is the tension between Iraq and the US and the weakening of the dollar. “Traditionally gold is considered as a safe haven in times of crises. After 9/11, the world witnessed many anxious moments… stocks fell as investors pulled out funds and invested in gold. The Indo-Pak tension also added to the bullishness of gold,” said a member of the Bombay Bullion Association.

Standard mint gold was available for Rs 4,570 per 10 gram on December 20, 2001. However, by December 20, 2002, prices shot by 21.66 per cent to Rs 5,560. “With tension remaining in the Gulf, gold prices will remain firm in 2003. If a war breaks out between the US and Iraq, gold may go through the roof…. and even touch Rs 6,000 or Rs 7,000 levels,” he said.

If prices go up further, observers say, demand can slow down. “A major part of gold demand is for marriage purposes. However, gold as an investment avenue is gaining popularity in India,” said gold dealer Arvind Shah, adding, “gold investors should watch the global developments closely and accordingly buy and sell.”

STOCK MARKET: Stock markets which took a massive pounding in 2001 are still struggling to get out of the depression. Though the benchmark Sensex recovered from the year’s lowest level of 2,828 recorded on October 28, it remained at 3,352.77 on December 24, 2002 as against 3,232.97 on the same day last year. This indicates a rise of 3.70 per cent, but on a year-on-year basis, prices of most of the leading counters have remained more or less at the same level with some even taking a beating.

Said BSE dealer Pawan Dharnidharka, “After market moved into scripless trading in rolling settlement, excessive speculation has come down. Besides, the ban on badla ensured the exit of speculators. Even the tribe of day traders has also diminished.” Though foreign funds (FIIs) were active in the market, their presence did not set the market on fire.

It’s true that many sectors, especially tech stocks, recovered towards the end of the year. But many market leaders shed gains during 2002. Reliance came down from the year’s peak level of Rs 344 to Rs 289.50 by December 23, Hindustan Lever from Rs 208 to Rs 165.30 and ITC from Rs 782 to Rs 667.35.

The market rally witnessed a rally in the month of November with market experts attempting to explain the rally with various reasons ranging from value buying, joining the bandwagon of a firm global trend, expectations of a revival in the Indian economy and hopes of improved earning numbers of corporates for the quarter to December 2002.

According to fund managers, the year 2003 hold the same uncertainty as witnessed in 2002. “But the economic growth is gaining momentum. If industrial growth sees further improvement and corporate results improve, markets will take off by at least 25 per cent. However, this will depend on global conditions also,” said a fund manager with UTI. Sectors to be watched: Technology, telecom, pharma, cement, auto, oil and PSUs.

PRIMARY MARKET: The calendar year 2002 is a write-off as far as IPOs (initial public offerings) are concerned with only 6 IPOs mobilising a paltry Rs 1,981 crore ($411 million) and many mega IPOs not seeing the light of the day. Worse, almost half of this mobilisation has come courtesy four PSU bank issues; the only two private sector IPOs to hit the market were of Bharti Tele-ventures (Rs 834 crore) and I-Flex Solutions (Rs 210 crore). The year may appear a huge improvement by amount over the disastrous 2001 which had mobilised only Rs 392 crore but Rs 1,981 crore still remains a very small amount. By number of issues, the year 2002 was a huge letdown from 15 IPOs in 2001, according to Prithvi Haldea of Prime Database. The future doesn’t look bright for the IPO market as no major IPO is on the anvil in the near future.

n REAL ESTATE: For home hunters, 2002 was a good year. Prices remained stable and in many cases even fell by 10 to 15 per cent. In cities like Mumbai, prices came down to more realistic levels after real estate speculators lost their shirt. “The days of spiralling prices in the real estate are gone. In 2003, prices will remain stable at the same levels,” says an HDFC official. In 2003, analysts say, the demand for commercial properties will not show much increase though many new malls would open their doors catering only to the middle-class. But investors should watch out for real estate mutual funds. A clutch of frontline mutual funds are already busy giving finishing touches to their realty mutual fund schemes, with plans to hit the market in 2003. Said the Association of Mutual Funds in India’s chairman A. P. Kurian: “We have been examining the possibility of launching real-estate linked products for a couple of years now. We are confident about the success of such a product after having examined issues like the nature of the scheme and net asset value calculation.”

According to Credit Rating Information Services of India’s (Crisil) arm CRIS INFAC, the incremental funds required by fast growing the housing finance markets over the next five years will be to the tune of Rs 1,40,000 crore. According to a report on retail finance market, the housing finance market will witness a growth rate of 24.1 per cent in incremental direct disbursement over the next five years.

FDS, SAVING SCHEMES: When inflation is coming down constantly, it’s quite natural that bank interest rates would fall further. In 2002, interest rates across all maturities fell making costs of funds cheaper for both corporate as well as retail borrowers. Though industrial activity did not show much fillip due to rate cuts, retail lending to customers jumped manifold. Home loans, car loans and personal loans are selling like hot cakes as middle class is going on a massive shopping binge.

In the first half of 2003, bankers say interest rates will come down by another half per cent as they do not see any pressure on the inflation front. “In Western countries, interest rates are hovering at 4 to 4.5 per cent… if India has to make its industry competitive price of funds has to be brought down further,” says a banker.

The performance of the debt market has not been encouraging as several companies have been failing in their obligations towards interest as also the principal amount and debenture trustees have been mute spectators in most of the cases with some of them withdrawing from acting as debenture trustees. Yields on debentures rated above the investment grade are also declining.

Moreover, fixed deposits with non-banking finance companies in a majority of cases have got stuck with the companies defaulting on repayments. Banks are no doubt, a safe avenue of investment. The returns are, however, not very attractive due to falling interest rates. Moreover, the collapse of many co-operative banks and even private banks like Nedungadi Bank has made depositors shaky.

Deposits with post offices can get a return slightly higher than that of banks but the bureaucratic manner in which these deposits are handled act as a distraction to the investors. Government securities are not only absolutely safe, but also liquid. But this is basically a wholesale market with the retail investors being shut out of it.

In addition, there are a host of other schemes like National Savings Certificates, National Saving Scheme, Equity-linked Saving Scheme and Infrastructure Bonds with tax concessions and fairly attractive returns. There is also the Kisan Vikas Patra available for investment doubling in 7 years and 3 months but without any tax concession. Almost all the instruments readily available today for an ordinary investor to invest no doubt, give a steady return of 9-10 per cent, half of which is, however, eroded by inflation.