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Tuesday, Oct 31, 2006

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`Market likely to gain more in strength'

Deeptha Rajkumar
Shailesh Menon

Foreign institutional investors strike a note of caution

Mumbai , Oct. 30

Even as the benchmark BSE Sensex breached the 13,000 mark today, market players, in particular FIIs, cautioned against vertigo.

"There is no denying that it is a milestone. But it has been achieved and we need to move on. Let's not get carried away by numbers," says Mr Atul Mehra, ED and Head Capital Markets, JM Morgan Stanley.

According to Mr Mehra, the market will gain more in strength given the robust results announced by corporate India. "As long as corporate India continues to maintain similar growth profits aided by capex, there is nothing to stop us achieving greater highs," he added. Mr Mehra said it is the first time in the last year that FIIs have brought in more than $3 billon over the last three months - August, September, October — alone. Mr Arpit Agarwal, CEO, Dawnay Day AV Financial Services Ltd, told Business Line that post the Sensex breaching the psychological barrier, one can anticipate some amount of intermittent volatility.

"We are positive in the medium- to long-term as we expect the double-digit growth to continue. As long as infrastructure spend continues to be high, one will see a positive ripple effect on the economy. However, one can anticipate some amount of volatility in the near-term. Those who are fully invested can book some profits and keep 5-10 per cent of their portfolio in cash. They can use the intermittent volatility (dips) to re-enter," said Mr Agarwal.

Going by SEBI data, net FII investment in equity in the period January-October 30, 2006 is $6.533 billion. It crossed the $7-billion mark if debt market numbers are added.

"FIIs and mutual funds have played a major role in keeping the markets buoyant. If you see this year's (January 1 to October 27) investment figures, mutual funds have been net investors for about $3 billion and FIIs for about $6.4 billion. This has been the biggest trigger in driving up the markets," said Mr Ajay Bagga, CEO, Lotus India Mutual Fund.

Add on the increasing interest of domestic households to invest in stock results and mutual funds for the canvas to be complete.

"Household investments in mutual funds and stocks have increased from 1 per cent to about 5 per cent over the past year. The reason for this could be the huge returns (at an average of 22 per cent) on equity investments. Good economic growth, meaty corporate capex and increasing domestic consumption are the other factors that have helped the Sensex to move up," said Mr Bagga.

According to mutual fund managers, the current surge in markets has a narrow base. It is riding high on a few front-running stocks such as Reliance Ind, Infosys, ICICI Bank and TCS, they say.

"Long-term investments like pension funds are needed to provide liquidity in mid-cap and small-cap indices. The Government is planning to float pension funds (in the initial phase through UTI and LIC) to improve liquidity in the markets. We will also see private mutual fund houses floating pension funds in three to four years,'' said a mutual fund manager.

But there are others who feel the rallies would be much more broad-based once retail investors start entering the markets.

"Liquidity is dependent on several micro and macro economic factors. Strong corporate performances will always keep the markets buoyant and good economic conditions will ensure overall growth," said Mr Ved Prakash Chaturvedi, Managing Director, Tata Asset Management Company.

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