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Monday, Nov 27, 2006

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Market may move up further despite some scepticism


Volatility could be manifest in the IT and banking stocks

Cautious investors on Dalal Street are not in minority. After about four months of bull run, the benchmark has been giving jitters to many seasoned players regarding over-valuation. Despite this, the Sensex scaled new heights last week and is likely to move further upwards this week.

Overseas investors have been on the driver's seat in the last two weeks as predicted in these columns. Indications are that they are likely to remain positive but selective in the short term. Domestic investors have been so overawed by the FII aggression that they have begun to doubt their sense of timing for booking profits off the table.

It is not as if all the FIIs are buying - it is clear that some have been substantial sellers in the past fortnight. But, there were ready takers, who did not allow the index to sag. However, last week the overall exuberance of overseas funds was less than the previous week. In terms of net investment, it was nearly half (considering the provisional Friday figures put out by the NSE) at Rs 2,157 crore against Rs 4,182 crore in the week before.

Churning portfolios

Study of the daily investment figures confirms an impression that there were simultaneous exits and entries - indicative of variations in strategies among the foreign players. Numbers also suggest churning of portfolios and, in turn, differences in preferences and valuations.

The contrasting strategies and valuation targets of FIIs have lent volatility and have indirectly underlined an apparent homogeneity in the moves by the local funds.

Domestic funds turned distinctly negative last week compared to the previous week. It would be reasonable to assume that the differences in the tactic may continue to lead to greater volatility in the next few weeks in the large cap stocks. Contrasting style is likely to emerge in the next few weeks in the mid- and small-cap space too as the fund managers take a stock of the investment situation around the world in all asset classes to look ahead and set themselves for a readjustment in long-term calls.

Global cues

Short-term choppiness in the Indian equities is also a result of the global currency and commodities markets volatility. The general consensus is that a slowdown in US demand will impact economic activity in some of the Asian and emerging markets in 2007. However, growth in domestic demand in India (as also China), keep it somewhat insulated. But the apprehensions are that the corporate margins may get squeezed between lower than 2006 price increases and higher costs.

Fund managers are lowering expectations for the Asian and emerging markets. Brave hearts, though anticipate double digit returns from Indian equities, seem to be reorienting themselves with the new risk realities.

Interestingly, the hedge funds, which had flown out in the corrective heat of May-June 2006, are flocking in again here at the onset of the Indian winter with their absolute return-oriented strategies amid promise of greater volatility. The long-term conventional funds are, however, approaching with greater caution. This week volatility could be manifest in the IT and banking stocks, while the metal counters may shine in tune with international trends. At home, policy debates in the winter session of Parliament beginning this week may also cause fluctuations in the investing psyche. The power sector stocks may light up on expectation of policy boosters.

Lessons of 2006

The emerging markets, which are leveraged into the US economy, were among the most volatile. The recovery after June, though common to all markets, has been sharp in Indian equities, better than the most. The recent batch of 2007 outlook notes from major international fund houses acknowledge the fact.

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