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Market Watch: Getting back to the basics

This year investors appear a bit shy of ascribing crazy valuations to dreams and announcements and seem more intent on getting back on the straight and narrow, writes Udayan Mukherjee.

india Updated: Jan 30, 2008 23:19 IST

Even as the market seeks direction following its recent sell-off, some interesting trends are flashing on the screen. It may be premature to conclude much from the pattern of a few days but the initial signs may be telling us something. In the last few sessions, there is clear buying interest in sectors that were considered "unexciting" in 2007. It may be the first indication that 2008 may herald the return of the good old steady-state businesses.

The year 2007 was about dreams. Dreams are so much more exciting than going through the mundane routine of everyday life. Last year was thus a year of excitement till people got carried away and burnt their fingers. So, this year, investors appear a bit shy of ascribing crazy valuations to dreams and announcements and seem more intent on getting back on the straight and narrow. Steady 20 per cent earnings growth, robust cash-flows, high return ratios, quarter after quarter of growth delivery -- all things which seemed staid and boring last year, are suddenly back in vogue. So what if they appear somewhat less exciting than "exponential" growth projections four or six years down the line. Once again, a bird in hand is worth two in the bush. About time, too.

So we are now seeing steady buying in FMCG stocks, in select pharmaceutical names which are delivering good numbers, in some autos and even technology. In dated jargon we would have called this "defensive" buying , implying a return to steady cash-flow generators in unpredictable and uncertain markets. High beta sectors do well in momentum markets and the general perception now, for right or wrong, is that we will see less by way of momentum in 2008.

Now, momentum can certainly return to the market sooner than we expect, yet there is something fundamentally comforting about what is happening now. There was something surreal about the way investors were ignoring companies which churned out hundreds of crores of profits every quarter, even as they fell in love with stocks with no current revenues and distant promises. The disconnect was just too wide and had to be bridged. The process may well have begun. So, as you tailor your portfolio for this year, do throw in some of the old bluechips. At best they will make you feel a bit bad if the markets rediscover their crazy bullish mood of 2007 but you will feel much better on the rainy days when 70 per cent of your portfolio won't get knocked off in a week. Financial markets are not always about generating supernormal profits, sometimes they are about preserving capital too. Just like the middle overs of a one-day cricket match.

(The writer is Executive Editor, CNBC-TV18)