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With the stock markets beginning to crack, Dipen Sheth identifies some shares that may be included in the two portfolios and explains the reasons for his choices.

Dipen Sheth | Print Edition: October 16, 2008

What a fortnight it has been, for the real world as well as for investment managers! The mightiest economy in the world is down on its knees, attempting a “socialist” bailout of the perpetrators of credit excess. In the most prosperous nations of the world such as the US, Japan and the European Union, consumption slowdown and demand destruction threaten to push many commodities into a downward spiral.

Closer home, the prospect of negative surprises in the Q2 numbers, unstoppable inflation, currency weakness and elections looming on the horizon have hardly provided any counterpoint to the global gloom. Sentiment is hitting new lows everyday, perhaps a little lower than economic reality would suggest.

Not surprisingly, stock markets have lurched desperately between hope and despair. On 24 September, when we closed our portfolio books, the Nifty scraped to 4161 (5.43% down over the fortnight), while the CNX Midcap lost 8.67% to end at 5215. Our portfolios stayed the course, buffered by their high cash levels. Safe Wealth ended 2.8% down while Wealth Zoom went down by 6.16%.

After months of staying high in cash, we are still not buying. But perhaps this is a decent time to make a shopping list of what we can buy over the next few weeks. Here are the potential candidates.

Technology: Infosys is the clear choice for Safe Wealth (we should add to what we have already), with industry-leading margins, management quality and overall return ratios. What will happen to its prospects as financial giants collapse and consolidate? Your guess is as good as mine. Bartronics, which is rapidly growing its smartcards business, and Tanla Solutions (mobile value-added software and aggregation services) have both fallen to attractive levels to justify addition/inclusion in Wealth Zoom.

Capital goods & engineering: The good times may not yet be over for this sector. While leaders such as Bhel , Crompton Greaves, Areva and Suzlon are the obvious choices, we’ll have to look beyond them if deep value is to be uncovered. One of my analysts spoke recently with Titagarh Wagons, an aggressive player in the railway wagon space, and came back pretty impressed. AIA Engineering, which makes mill internals and grinding media, will ride the volume expansion in cement at monopolistic prices that it virtually dictates. Finally, although specialist battery maker HBL Power is not actively traded, its first quarter jump of over 400% in net profits (rather than its lack of liquidity in the stock market) and a clear technological edge encourage me to consider it for Wealth Zoom.

Construction: The staple diet here will perforce include L&T, Punj Lloyd and Grasim . No real estate (not yet), else DLF or Unitech would have made the cut. Meanwhile, companies such as BGR Energy, Lanco Infra, IVRCL, Shree Cements and Simplex Infra will appeal to the more daring among us when we revamp Wealth Zoom.

Metals: It’s a bad time to consider metals and resources stocks, but at some time in the not-too-distant future the cycle will turn. And top quality companies like Tata Steel , Jindal Steel & Power and Sesa Goa might appeal to our investing sense. If we get truly aggressive, we will consider Sterlite, Hindalco and JSW Steel as well.

Energy and oil: This is a huge sector and has surprisingly little to offer today. Big gun Reliance is under pressure from falling refining and petrochem margins as well as the prospect of lower (and delayed) profits from its oil assets. ONGC, it seems, exists to fill the treasury coffers at the government’s will rather than to earn fair returns for its shareholders. For all its capability and promise, Cairn is a pure play on oil prices, while Aban Offshore, the largest Indian company in oilfield services, is coming under increasing financial stress. Perhaps we should just wait for Coal India’s much awaited IPO to happen.

Power: Regulated returns act as a hindrance here for profits to be earned in a fair, market-determined way. But the sheer growth, safety and management capability in companies such as NTPC, Tata Power and Powergrid will push me to consider them for inclusion in Safe Wealth. For Wealth Zoom, we might include CESC.

That leaves sectors such as consumer goods and services, finance (mostly banks), healthcare (pharma and the like), automobiles, logistics, textiles, chemicals and the diversified lot for the next instalment of our shopping list. Trust me, there’s plenty of time to pause before we buy.

READERS’ RESPONSE

Waiting for a crash to happen is exactly what we call “timing the market”. There is no time horizon for it. It can happen in one month or it may not happen for three to four months. It would be more prudent to buy on dips, and if there happens to be a rally take some profit out of it.

Not all sectors and stocks plunge at the same time. So, while it may be a good time to buy Tata Steel or Sterlite now (for the long term), they may not be at these levels when the market goes down. IT and Pharma have shown this earlier.

—Anuj Rastogi

Look at the benchmark indices. Safe Wealth has outperformed the same by a mile. Wealth Zoom has very marginally underperformed.

Kudos to the fund manager. (Can’t understand all the hue and cry about holding versus flushing it down to lower levels.) We will have to wait for the credit-crisis tide to settle.

Wealth creation is slow, painful and boring. So keep the faith and be patient.

—Pramod T. Palathinkal

Disclaimer: Model portfolios are based on the independent opinion of Dipen Sheth, head of the research team at Wealth Management Advisory Services. They do not reflect the opinion of the firm.They are for reference and information of readers.The firm is not soliciting any action based on the portfolios.

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