The Hindu Business Line : Liquidity may drive markets further

Last week FIIs pumped in Rs 1,262.28 crore, about Rs 495 crore more than the previous week. This was in line with view predicted in these columns. All these happened despite a sharp dip in the benchmark indices on last Monday. Local mutual funds also were net positive investors to the tune of Rs 412.46 crore in the first four days of the week.

Liquidity play

It is the liquidity flow that helped the Indian stock market avoid a possible "correction" last week.

But has Dalal Street developed immunity to the global jitters since May, when meltdown in international metals markets prompted a strong outflow from the Indian equities?

Plunge in some of the base metals had an influence last Monday on the domestic indices and FIIs went short on index futures. But it could not make a deep dent in the investors' confidence.

FIIs, for instance, in the cash market remained net investors even on last Monday. In fact, on last Wednesday the combined net investments by the FIIs were Rs 519.40 crore, highest since August 17, when they put in Rs 808.80 crore in the net.

There are two likely reasons for the Indian market to attract liquidity this week too even as voices in certain quarters have begun to murmur that the market has become pricey.

First, a significant sum of money committed to Indian equities has not been invested and the second, the corporate India has raised hopes for relatively better returns, hence some still see room for re-valuation.

In June 2003, The Economist ran a cover story "India v China: A Tiger, falling behind a Dragon." But in recent years India's economy has been steadily rising and now the Tiger, observers feel, is making a run at the Dragon.

The Sensex was only 3300 in December 2002 but now it has broken through 12K for the second time with ease.

Grant Thornton, a leading international audit and consulting firm, recently carried out a survey of business confidence of more than 7,000 owners of medium-sized businesses from 30 countries. Surprisingly, India ranked number one, ahead of the G8 economies, China, and Europe's "Celtic Tiger," Ireland.

The fact that India is increasingly building from the ground up - first in the services and, now in the manufacturing - has not gone unnoticed in the global investment circles. That is why till the middle of last week when emerging markets funds were reporting net outflow and the US-directed equity funds were attracting increased attention as the Dow was pushing ahead towards it all time high, the inflow to the Indian market did not slow down.

However, the last serious correction in May-June underscored the market's vulnerability to shifts in global investor's risk appetite.

Expensive..but

Currently the Sensex is trading little over 18 times its 2006 earnings, far more expensive than China at around 13.4 times and the MSCI Asia Pacific (excluding Japan) of around 14 times.

Last Monday has also proved that Indian market is at present better poised to absorb external shock. But that dose not prevents the market from turning volatile.

Fund managers, overseas and local, indicate that investment strategies are currently geared towards individual stocks rather than sectoral whether it is in the large, mid- or small-cap spaces.

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