Monday, January 01, 2007

Index is the face of the market

It was a mixed year for ET indices, with six of them outperforming the market between January 2 and December 22. Out of these indices, ET Infrastructure and ET Cement outperformed the market by a huge margin. ET Infrastructure’s returns during the period were more than four times those of the Sensex whereas ET Cement logged returns that were slightly doubled than those of the benchmark index.

Other indices, which outperformed the market are ET Metals, ET Midcap Growth, ET Capital Goods and ET NBFC. While ET Metals and Capital Goods are sector trackers, ET Midcap Growth covers companies in the mid segment, across all sectors and captures the growth potential of the segment, irrespective of sectoral dynamics.

The performance of ET Infra was along expected lines with huge spending in the sector, aided by private sector participation. The sector gained considerably on the back of government projects for highways and other road infrastructure. Apart from that, hydel projects, which have significant amount of civil work, also boosted the index.

Drivers for ET Cement are Housing & Real Estate development, apart from infrastructure development. Significant shortage in cement supply led to higher prices, which is directly adding to the bottom line of these companies.

Another parameter to gauge the performance and the current standing of the companies could be the change in P/E ratio over the year. ET Consumer Durables and ET Infrastructure have seen the maximum increase in their P/Es over the year.

ET Consumer Durables’ P/E stands at over 91, up from 53 on January 2, ’06, and the sector could be somewhat overvalued now. ET Infra’s P/E has gone up from 26 to 53 during the same period.

Apart from these two, no other index has seen much appreciation in the P/E ratio. However, ET Sugar’s P/E has fallen from 18.6 to 8, indicating sharp change in the operating environment. ET Lifex and ET Hospitality are other indices, which have seen a fall in their P/E.

A critical event of the year was crash in May, when the market fell by about 30%. However, there has been a recovery since then, and the Sensex is up by nearly 7% over the previous high. Apart from ET Infra, which has gained 37% since then, ET Infotech is up 20% and ET Mindex has risen 17%.

Other indices, which have outperformed the market, post-crash, are ET Cement and ET Banks. On the other hand, indices, which have not recovered, are ET Sugar (down 60%) and ET Metals (down 20%) from May 10 levels. ET Metals has seen a sharp reversal of fortunes since May, with metal prices falling significantly. However, the index, which had gained 100% between January and May, is still among the top five performers among ET indices.

On the flip side, many of the indices underperformed, with 13 indices giving a return of less than 20%. The worst is ET Sugar, which fell 32% during the year. The sector witnessed a sharp jump in ’05, with significant sugar shortage, both in domestic and international markets.

However, with prices off-peak now and prospects not too bright, the stocks in the sector have taken a beating. ET Oil & Gas, down 1% was the only one to give negative return. It was under serious pressure till some time back and has got some respite with a fall in global crude prices.
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