Curls And Curves

Despite the industrial slowdown in the last year, some industries have shown growth. A report on sectors that have rewarded the investor in the recent past and look capable of yielding more in the near future.

Asset allocation strategies can degenerate into hopeless jargon about being `top-down', `benchmarked', `overweight' and `underweight' which only confuses the hapless investor. Translated into plain language, a `top down' strategy involves considering broad industry factors first and then choosing individual companies rather than searching for individual performers first and then trying to build up a macro picture of industry trends.

Portfolios need to be benc-hmarked against a market index. Being overweight means investing more heavily in a certain sector while underweight ought to be self evident. If the weighting is right, the portfolio will outperform the benchmark index.

 

Assuming the Sensex as a benchmark, and taking a top-down view, the successful portfolio manager would have to score in excess of 31 per cent in the last six months in order to outperform the benchmark. Very few industries or combination of industries would have yielded that level of return in the last six months. Please note that the ge-neral market performance personified by the equal-weighted Allshares Index has been 9 per cent since December. The Sen-sex is a concentration of heavyweights which have outperformed the general market trend by 22 per cent in the last few months.

Out of a total of 200 industry segments, just 13 have yielded returns in excess of 25 per cent since December as the accompanying charts show. The base for all the industries have been set to 100 points in January 1990. The industry graphed are constructed by equally weighting individual scrips. Higher than Sensex returns have come only in 10 industries. Self-evidently, only a top-down portfolio that was overweight in those 10 sectors could have outperformed the market.

Should one blindly construct a portfolio that is highly overweight in those 10 sectors and expect it to continue outperforming in the future. Not really, the slowdown in the second half of 1996-97, has had a lagged effect on some of these industries as well. Inevitably some of them will start pulling back while others which have not performed spectacularly will start to do so.

Here a technical look at the industry graphs could help an investor decide which of these segments still have growth built in. Those are the ones to go overweight in the near future timeframe of 6 months to a year.

For example, of the first seven performers, three have been dropped as inherently technically risky. Computer education is effectively an one-scrip industry and NIIT's priceline does not inspire too much confidence. The auto ancillary instrumentation segment is also two narrow - only two worthwhile scrips are listed in International Instrum-ents and Premier Instruments. Both look to be weakening.

Personal care MNC scrips are quite solid where the industry priceline is concerned. But this sector is also very highly priced and consists of possibly overvalued blue chips. Ciga-rettes again is a one scrip industry and ITC does not look good for further short term returns despite its standout performance in the last two months.

That leaves us with four industries where going overweight looks to be a paying prospect. These are large Software stocks, Motorcycles and Mopeds, Large housing finance companies, and genset and turbine manufacturers. A closer look at each of these industries appears worthwhile.

Software

The top industry performer appears to be large software stocks. This is an index of six big companies comprising Digital Equipment, Infosys technologies, Pentafour Software, Rolta India, Silverline Industries and Tata Unisys. This group has given phenomenal returns scoring an averaged gain of 90.32 percent in the last six months. It appears to be still a good buy.

The industry priceline started moving up with a bullish sequence of three higher bottoms from January -December 1996. After December 1996, the industry has not really looked back. The industry priceline has completed a bullish double-bottomed saucer over the period September 1994 to April 1997. The lip of this saucer was penetrated at around 595 points in April. This critical upside breakout also came on high volume. The index hit a recent high of 670 points before drawing back to its current value of 648 points. The long term target of this pattern is around 750-800 points implying further gains of around 15-20 per cent soon.

Individually, Pentafour Soft-ware and Rolta have been underperformers, moving up off bases. Silverline Industries has been the only scrip which has moved contrary to the general industry trend. Digital, Infosys and Tata Unisys have all shot up very fast.

Motorcycles/Mopeds

The sector includes Hero Ho-nda, Kinetic Engineering, Maje-stic Auto, and TVS Suzuki. Two of these scrips have had standout performances in this financial year and look to possess more potential. The sector performance as a whole has yielded close to 50 per cent in averaged returns in the last six months.

The industry priceline is on the verge of completing a bullish breakout which would complete a 3-year bullish saucer. Previo-usly the industry has already seen the completion of a spike between September 1996 and March 1997, which predicted an upside target of 1550 points. So the minimum short -range target would be another 10 per cent up. Interestingly if the priceline completes that target it would be projected to go another 35-40 per cent in the next 18 months. There is resistance at the current price however and there is also support 50-100 points down.

Out of the group, Hero Honda and TVS Suzuki have shown strong rises while Kinetic and Majestic have not been fair performers. An investor staying with this segment probably should continue to be interested only in Hero Honda and TVS.

Large Housing Finance

This segment possesses three scrips: Canfin Home, HDFC and LIC Housing Finance. Of these, HDFC and LIC Housing appear all set for a long bull run and HDFC would in fact fall into the category of royal blue chips.

Technically the sector has had an uneven performance with sharp trends in either direction. The industry bottomed in November 1996 and has risen to a high of 675 (plus 39 per cent) since then. At that mark, it has strong resistance. If the industry priceline rises past the 700-mark, it will complete a bullish spike. It would then have a target of around 900, a gain of around 30 per cent could be expected soon. The priceline also has solid support at 630, a 5 per cent drop from current levels.

The HDFC priceline almost exactly mirrors the industry index except of course the values are different. LIC Housing shows a shallower and less powerful rounded bottom formation. Both scrips are on the verge of a breakout and possess support 5 per cent below current levels. Canfin Home finance has shown a continuous fall for three years, on the other hand.

Gensets and Turbine manufacturers

As any Indian knows, power shortages are an endemic feature of every Indian summer. As such, the market for gensets and turbines is showing healthy growth. This segment includes Birla Yamaha, Punjab Power, Shriram Honda and Ucal Power Systems.

The industry priceline has also shown steady growth with advances along a rising trendline. The long term bullish trend has been in force since mid 1995 and shows no sign of reversing direction. It is however impossible to really predict targets for this sort of pattern.

Ucal Power Systems and Punjab Power are both in bad shape trading close to Rs 2. Shriram Honda has mirrored the industry scrip pattern. Birla Yamaha is showing signs of technical weakness with successive lower bottoms after a great rise in the first half of calendar 1996. Shriram Honda is by far technically the best scrip in the industry.