Sticking to large-cap stocks may pay dividends

MUMBAI: One by one they all went down, the sectoral indices that is. IT had already perished, a while ago, (it has fallen 33% over the last one year) and on Monday, even Bankex fell 6.9%. But the biggest worry for people in the market is the 13% decline in BSE Metal Index. If market watchers could read the tea leaves, this would be the sign that would trouble them the most.

It is the fall, of this particular index, that worries fund managers the most, as it brings the US recessionary fears to the shores of India. “The US happens to be the largest user of metals and commodities. When that country is on the brink of recession, it is getting reflected in the metal index. Other indexes have fallen because they were overvalued. But the fall of the metal index should be considered seriously,” says CIO of Quantum Mutual fund, Devendra Nevgi. The metal index was up by 66% over the last one year.

Copper is considered as a benchmark, in the international markets, when it comes to understanding the demand supply situations for metals. Every time, the US goes into the recession, copper happens to be a lead indicator, as it is used in housing industry ,as well as, the wire industry. Though copper has gained 11% over the last two weeks of January 2008 on the LME, analysts expect the price of this metal to fall. Copper prices have fallen by more than 8% every time the US has gone into recession. The BSE metal index mainly constitutes of aluminium and steel and these companies will be hit once the news from the overseas markets is clear.

Investors have seen their sector funds or indexes do well as compared to the Sensex over the past one year. Apart from the IT index, most sector funds have given higher returns to the investors. But the fears of the US getting into the recession is ensuring that investors should not get back to their diversification strategies as predicting growth rates will become difficult. ” I feel investors should stick with large cap or even better still with diversified index funds as this will minimise their risks,” says an active fund manager with a MF who avoids investing in stocks that are a part of the Sensex. Has the bad news season just begun?