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Weak firms have led big bear market rally

Weak firms have led big bear market rally
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First Published: Sun, Dec 21 2008. 11 49 PM IST

Updated: Sun, Dec 21 2008. 11 49 PM IST
The markets have bounced back by about 20% in the past one month, but some stocks have climbed by as much as 50%. These are among the ones that fell the most and include companies such as Unitech Ltd, Tata Motors Ltd and Suzlon Energy Ltd.
Some stocks that have risen sharply are ones where the markets were till recently speculating whether the firms would become bankrupt. As one fund manager with a domestic fund house puts it, “Junk stocks have led the current bear market rally.”
Importantly, the fundamentals for most of these companies haven’t improved and their outlooks remain gloomy. For instance, the markets are busy celebrating lower interest rates and the package for home loans up to Rs20 lakh. But this isn’t expected to end the predicament of most property developers—sales are still slow.
The bigger problem for them, of course, is the struggle to raise money, and that situation hasn’t changed with banks still wary about lending. Still, shares of Unitech have doubled from their 52-week low hit early this month.
Similarly, the markets have cheered the impressive consolidated results Tata Steel Ltd (stock up 66.6% from lows last month) reported for the September quarter earlier this month. What has been conveniently ignored is that most brokerages have said that it’s the end of good times for the company and the outlook for the next few quarters is bleak. Some have even predicted a loss for the overseas subsidiaries in the December quarter.
The prospects of Jaguar Land Rover (JLR), Tata Motors Ltd’s recent acquisition, are dreary since sales are driven by easy availability of finance, given the high cost of each vehicle. Besides JLR’s customers, the company is struggling to tie up funds to repay its acquisition loan and keep the JLR operation sustainable.
With lower sales, JLR would be losing cash, which means the company would have to raise funds from outside to fund high R&D costs. Besides, domestic sales have been declining rapidly, which will result in much lower cash flow from the core operations. Still, the stock has risen by 43.4% in the past month.
Such stories abound. As far as Suzlon Energy Ltd goes, although an agreement with Martifer SGPS SA about a staggered payment schedule is positive, worries about its funding constraints remain. Worse, operations have been hit as quality issues have cropped up with its wind turbine blades. With oil prices falling to as low as $35 a barrel, the cost of installing and running a wind power unit is relatively higher. Yet, Suzlon’s stock has risen by 60.8% from its lows this month.
What’s more, the Indian market has been one that has bounced back the most off the lows it hit last October. While the Bombay Stock Exchange’s benchmark Sensex is up 31% since, the UK’s Footsie and the US’ Dow Jones Industrials are up 17% and 16%, respectively, off their lows. In Asia, the Seoul Composite has gained 32% and the Hang Seng is up 42%.
One way to look at this is that the correction initially was too severe and stocks are now reverting to reasonable levels. Another reason is a modest revival of risk appetite, as seen from the fact that in the third week of December, global investors pulled cash out of money market mutual funds for the first time in 13 weeks, while it was the seventh consecutive week of net inflows into equity funds, according to international fund data from EPFR Global.
Other measures of risk appetite such as the US Vix index and the spread on emerging market bonds are down from their peaks but are still at elevated levels.
For many stocks that have risen the most, the extent of the rise suggests a big change in expectations from these companies at a time when fundamentals haven’t changed materially. Liquidity is improving, but the fundamentals aren’t.
Write to us at marktomarket@livemint.com
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First Published: Sun, Dec 21 2008. 11 49 PM IST