Investors betting on expensive stocks, especially FMCG, private banks, select auto and capital goods shares earned good returns in 2012. Lack of adequate alternatives also contributed to this trend.
Investors betting on expensive stocks, especially FMCG, private banks, select auto and capital goods shares earned good returns in 2012. Lack of adequate alternatives also contributed to this trend. Analysts who took a bearish call on FMCG and some of the private sector bank stocks, were consistently proved wrong. Money managers justified high valuations of these stocks saying there were no other comparable companies to invest in. And while earnings growth in most cases was decent, they still failed to justify the exorbitant (30-40 times forward) price earning ratios many the stocks were quoting at.
But as stock prices kept climbing, many of the skeptics too came in to buy, lifting the shares higher, and sparking a virtuous cycle where every rise in price would attract more buyers. And with the trusted names among frontliners delivering consistent returns, fund managers chose to back them rather than risk money on undervalued stocks operating in industries with a hazy outlook.
Capital goods, IT, two-wheelers, oil & gas, and power shares struggled in 2012, and investors are not sure yet whether it is time to look at them. (The BSE-Capital Goods Index rose 35 percent in 2012, but that was driven by a 60 percent increase in L&T which has a 60 percent weight in the index)
The strategy of betting on steady performers may have run its course, with every single stock in this category appearing expensive. If anything, high priced stocks are most vulnerable in case the local and global economies turn around sooner than expected. So far there are no signs of recovery at least in the domestic economy, even though share prices in most sectors appear to be factoring that. Should economic indicators worsen further in 2013, expensive stocks could get even more pricey as investors choose a safety first approach.
But should the economy start gaining pace, fund managers will make a beeline for the stocks they had been ignoring for so long. And investments in the undervalued companies will come at the expense of the high-fliers, as investors re-allocate their portfolios. This may not necessarily spark a crash in the heavyweights, unless their growth rates start tapering off sharply. But they not command the rich valuations they have managed to command for the last couple of years.