The overall mood on the stock markets is unmistakably bullish.
But, domestic and foreign investors are preferring two different sectors: while the former are playing safe with old-economy shares, the latter are fancying technology stocks.
Foreign investors are seeing two strong aspects in the economy. First, they are bullish on the country's macroeconomic variables. Second, they see a full circle in investor opinion and market action that has taken with regard to industrial and technology counters.
In a recent report, Morgan Stanley, a global investment bank, said, "Investor sentiment is largely in favour of technology stocks rather than industrials."
"Valuations, at six-year highs in the case of industrials and at five-year lows in the case of technology stocks, are not in favour of industrials."
"Our perplexity arises from our view that growth could be cyclically slowing. And even if several industrial companies could be benefiting from structural changes, such as commercial-vehicle demand, the fact is that structural growth rarely survives the cyclical downturn," the investment bank said in the report.
"The leading indicators are slowing. The real currency growth, which leads industrial production by three months, continues to head lower, indicating further slowdown in the coming months," it added.
"On an aggregate basis, old-economy stocks are trading close to their 1997 highs, while the industrial growth rate has halved since then. In contrast, shares of software services companies are trading at five-year lows in valuation terms. The technology stocks have significantly underperformed the market year-to-date despite the recent rally."
Infosys Technologies seems to be the favourite of most foreign funds due to the low valuation gap that it has with the sector.
However, an equity analyst from a domestic brokerage disagreed on the view that investor sentiment is towards technology stocks.
He said, "Most investors have suffered good setback because of the recent meltdown. In fact, in the last bull run which we witnessed, the old economy stocks have performed well."
"Investors are also looking at dividend yields, and old-economy stocks yield better dividends. The fundamentals of old-economy shares are better.
"Technology stocks, on the other hand, have not performed well and most of the guidance coming from the IT companies are also not encouraging. Even second-rung tech stocks have not performed well. Therefore, our interest still remains in the old-economy segment," he added.
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