“Sectorwise” performance: myth or miracle?

Introduction:

In a stock exchange, several companies are listed. Some of them belong to a particular industry or “sector”. For example, in the banking sector there are several listed banks, public sector banks such as State Bank of India, Punjab National Bank, Indian Overseas Bank etc. Examples of private sector banks include Karur Vysya Bank, Kotak Mahindra Bank, Karnataka Bank etc.

In the popular financial newspapers, magazines and television channels we often encounter reports like “the sugar sector is performing extremely well”, “the media sector is on fire”, “the textile stocks are outperforming the overall market” etc. This essentially means that the stocks from a particular sector are wanted by the crowd strongly compared to some other sector. Why does this happen?

If anyone had been an active market participant, he would know what the normal stock market practice is.

1. Some people have their own ideas, they think the time has come to enter a particular stock or exit. They are “intution” based investors.
2. Few invest or trade based on others’ view or reports. There are hundreds of web sites and magazines offering investment advice, such as buy/hold/sell strategy. Some TV Channels allocate a time slot exclusively for this purpose.
3. Part timers believe in “buy on rumour and sell on news”. They somehow manage to get information from “reliable” sources and act accordingly. This may or may not work all the time.
4. People who know the risks and rewards of stock market, the professionals always try to analyze the market and form a strategy that suits them with regard to time frame and profit margin. These people are somewhat rare.

Usually, a stock runs up expecting some “good news” or “positive news”. For example, depreciation of rupee value could be a booster for the software industry since they will get more rupee for each dollar earned. The federal government may allow export of a commodity more than the usual quota or a company may acquire another well performing company. Example of “bad news” or “negative news” may include losing a lawsuit, loss of revenue due to changing business conditions, price increase of a certain commodity (such as aviation turbine fuel may be negative for airline sector).

People may have noticed that the stock may not go up as positive news was published in the media. This is because the stock has already run up expecting the news.

The stock price, usually goes up or down, whether in the short, medium or long term as and when this kind of situation arises. The demand can be seen for a stock when the crowd expects a positive news and a sell off can be witnessed when the crowd anticipates a negative news.

The daily chart of UTV Software Communications Limited is shown below. The stock ran up sharply from 179.55 on 01/11/06 to 278.65 on 14/11/06.

The following text is from NSE regarding this stock dated 08.11.06:

“The media had reports that News Corp may pick up a sizeable stake in UTV Software Communications Limited. The Exchange, in order to verify the accuracy or otherwise of the information reported in the media and to inform the market place so that the interest of the investors is safeguarded, had written to the officials of the company. UTV Software Communications Limited has vide its letter inter-alia stated, "Please note that the article is an independent story by the publication and did not emanate from any official press release from the Company. As regards the news article, 'News Corp eyeing sizeable stake in UTV', we have to say that, at present there are no such proposals having been discussed by the Board of Directors of the nature stated in the news report."

So the company did deny such rumours floating in the media. But few days later, more news came out, this time though, it was issued by the company itself: (Source: Corporate Announcments in NSE)

Dated 24.11.06:

“Utv Software Communications Limited has informed the Exchange that the Company has received the approval from Government of India, Ministry of Finance, Department of Economic Affairs, Foreign Investment Promotion Board (FIPB) unit granting its approval for the acquisition of the entire shareholding by The Walt Disney Company (Southeast Asia) Pte Ltd (Disney) in United Home Entertainment Limited (Hungama TV). The said entire shareholding of Hungama TV is being acquired by Disney at an enterprise value of USD 31.125 million”

Dated 27.11.06

“Utv Software Communications Limited has informed the Exchange that the Company has entered into a term sheet with Astro Multimedia International (BVI) Limited (Astro) for establishing a television channel joint venture business in India, South Asia and South East Asia. The scope of business of the joint venture company will be to create, develop, produce, own and operate one or more TV broadcast channels targeted at the age group of 15 to 25 in India, South Asia and South East Asia. The Company and Astro will hold 50% each of the equity capital of the Joint venture company. The aforesaid is subject to all regulatory approvals required for operating televisions channels in the territory being obtained and definitive agreements.”

Dated 08.12.06

“Utv Software Communications Limited has informed the Exchange that "The Company (1) Has entered into an arrangement with Indiagames Limited and its promoters for acquisition of controlling equity stake in Indiagames Limited, a Mumbai based mobile and online gaming company for a consideration of around Rs. 68 crores. (2) Has entered into an arrangement with Ignition Entertainment Limited and its promoters for acquisition of controlling equity stake in Ignition Entertainment Limited, a UK based company involved in developing console games for a consideration of around Rs. 60 crores. (3) Has initiated development of animation movie projects with total investments to the tune of Rs. 135 crores over a period of next three years.”

It can clearly be seen that the stock ran up expecting positive news. The story floating in the market place was obviously something different, but ultimately there was some news officially declared by the company.

The above was just an example of a particular stock moving up based on expectation of positive news. The sector wise movment was noticed between October 2003 and April 2006 in the same manner in sugar stocks.

The following table gives the stocks’ appreciation in sugar sector.

Scrip	Close 1	Close 2	Gain	Current
	30.09.03	28.04.06		Price
BAJAJ HINDUSTAN *	13.60	534.50	39.30	162.95
THIRU AROORAN SUGAR	32.80	598.70	18.25	121.15
SAKHTI SUGAR	22.45	252.10	11.23	88.70
KCP SUGAR INDUSTRIES *	2.68	73.75	27.52	18.00

* Adjusted close price due to stock split

So, what was the bad news in May 2006 that started the “steep” fall to the current levels?

http://in.biz.yahoo.com/061213/203/6a9mw.html says:

“…In response to the rising prices in the domestic market, the government had clamped a ban on sugar exports in July, 2006. The global prices were lucrative at at time, ruling in the range of $420 to $460 a tonne. The domestic price rise was due to a combination of several factors like hoarding and manipulation in the future markets and not due to shortage. Since the imposition of the export ban, the industry has been lobbying for its removal. The government had at the same time also allowed sugar imports against low duty, but no substantial amount has entered the country…”

It can be clearly seen that the market participants knew that the bad news was already on the the cards and decline started in May 2006.

Conclusion:

The news based buying or selling is not a great strategy for an ordinary investor. Rather, he should look for increasing his profits either by his own research or getting some qualified expert advice. News based rally never really lasts long.