The Hindu Business Line : It's cautious optimism, but liquidity holds the key

In the last fortnight, the Sensex has moved up around 10 per cent primarily on improved liquidity and better-than-expected corporate earning reports. Is the recovery going to get capped at 11K on the Dalal Street benchmark in the near term? Would technical resistances kick-off another bout of selling dragging the Sensex near to the support levels around 10K?

Cautious optimism

The meltdown in May is still fresh in the minds of the investors. But the late July and the first week of August showed that global investors are actively reworking their strategies for India apprehensions over higher interest rates, slowing earnings growth and moderation in global growth in the second half of the calendar year notwithstanding.

Last week, FIIs were net buyers worth Rs 548.57 crore (taking into consideration the NSE provisional figure for August 4). MF were net sellers to the extent of Rs 46.08 crore.

Market nerves have calmed after strong indications that monetary tightening may not strangulate the growth momentum in the domestic market. As of now, the pace of deterioration in the current account deficit has slowed down after sharp deceleration in the imports of gold and silver.

Though the egg and chicken situation still persists in terms of capital flow and current account deficit, both RBI and the Finance Ministry seem to be geared toward hands on management.

Fund managers are closely watching the fiscal front too. Some of the money managers still fear that India may overshoot its full year Budget deficit target. On the other hand, worries over higher cost of capital and depreciation charges for corporates are held as key risks to the optimistic earnings growth expectations.

Equity revaluation

Even as country's big corporate houses are gradually marching towards the status of multinationals with wider shareholder base and an extended global reach, high family holding and low dividend payout are still considered as impediments for better valuations.

The re-rating exercise is essentially linked to the price-to-book ratio, dividend yield, price/earnings ratio and return on equity. For a small cap, investors are yet to shed hesitation over double-digit P/E.

Large- and medium-cap stocks, though have graduated to double digit P/E, very few are willing to change the mindset that most of them are "reasonably priced".

As things stand, only liquidity flow is likely to determine the slow-changing perception of growth premium in the near term.

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