The Hindu Business Line : Range-bound movement likely — A conservative view is benchmark may produce a moderate return in 2006

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Range-bound movement likely — A conservative view is benchmark may produce a moderate return in 2006

Jayanta Mallick

THE year 2004 ended with a promise for Indian equities. If India is on its way to become the world's third largest economy by 2010, 2006 could prove to be a defining year for Dalal Street.

Renewal of global capital's focus on Indian stocks is likely to be feature in the first half of 2006. Lure of Indian capital market is gaining stronger on exceptional returns underlined by relative safety and maturity. From Tokyo to New York, new money is being raised for onward journey to India.

Glowing benchmarks: The Indian benchmark index, Sensex, has given a return of 42 per cent, while broad-based BSE 500 has yielded a return of 36.45 per cent.

Among the market out-performers were BSE indices for consumer durables (114.48 per cent), capital goods (93.46 per cent), FMCG (55.27 per cent) and automobiles (49.71 per cent).

Diversified mutual funds posted an average return of 47 per cent in 2005.

But it would be difficult to maintain the level of returns in 2006. A conservative view is that the benchmark may produce a moderate return of 20 per cent return for the whole of 2006, less than half of 2005. This is because the valuations of frontline stocks are reaching their limits.

Mid-caps to attract bulk of funds: The hypothesis is extended further to suggest that more money would chase the select mid-cap stocks, valuation bases for which are lower and growth prospects are higher. Investor's focus may not be to discover macro trends but the micro stories.

Will the mid-cap stocks be able to live up to the expectations? There have been ample indications of a quiet revolution in the mid-cap space. Robust M&A activity, expansion plans and spruced up corporate governance have been replacing a run-down image, built over the last few decades.

While the blue chips have to struggle to meet the return expectations, the smaller companies have to grab the unfolding opportunities and drive on the fast lane.

Market expectations from the policymakers are that of maintaining the growth momentum. If that is secure, then the market is ready to ride a roller coaster and the short-term corrections would be seen as opportunity for consolidations.

In the first week of 2006, the market is likely to remain range-bound and may even drift a bit downward. As long as undertone is bullish and liquidity tap is open, no one minds a breathing pause.

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