Undercurrent still favours bulls

Undercurrent still favours bulls

market may witness short-term volatility
The broad Indian stock market appears to be placed in a stable zone and the sentiment as well as the money flow trend seem to be fairly strong. The vulnerability of the benchmark index, however, still remains, and, perhaps, will persist in the short-term, as long as it scales new peaks. Doubts about present valuations in relation to the forward earnings growth and concerns over relatively (historically too, to a significant extent) low risk premiums, are, however, likely to dog Dalal Street in the near future.


Globalisation gamble

A serious correction in the developing Asian markets, led by China and India, and emergence of a domino effect cannot be ruled out in the short term when money flow is dictating the terms in all the asset classes. But Asia’s (ex-Japan), particularly India’s and China’s, unfolding economic paradigms are quite different now from what they were during the 1997 July Asian financial crisis.

Indian stock market, after gradual opening up since early 1990s, has by and large managed to overcome external shocks well. Even the 2001 crash was not so much for the global dotcom bust and its after effect, but for internal systemic inadequacies. India and China were among the unaffected by the crisis 10 years ago as both resisted rapid capital market liberalisation.

Today, both are considered top two growing economies and, as a result, having an extended bull run in their stock markets. Yet, these poster markets are under pressure to liberalise further as they continue to function in an imperfect global financial system dominated by the developed world, former World Bank economist Mr Joseph Stiglitz recently suggested. Though far more globalised now than in 1997, India’s foreign currency reserves provide a safety net against any possible crisis. Also a relatively higher interest rate regime and better stock market returns are likely to ensure capital inflow in the medium to long-term period.

Local dynamics

But, the portion of the inflow to Dalal Street, which could be described as ‘hot money’, today is not very significant. The recoveries after recent meltdowns – 2006 May and 2007 February – have shown the market’s resilience in coping up external influences. The flight of capital was also short-lived.Thus, a prospect of a better agricultural growth in this fourth consecutive monsoon-fed year helped the market take a direction call eventually. Market intelligence, however, suggests that the investors are expanding their portfolios more in the mid- and small-cap space.

It may not be surprising if in the short run, broader indices outperform the benchmark. The news flow related to stronger growth pointers and heightened M&A activities has been evident like never before.

Though part of the money flow into these counters may not be above board and could possibly be short-term, the broad trend seems one of an informed investment expansion.

In the short run, the Sensex and Nifty may move up or down within a band of five per cent. But the next 500 stocks may witness an upward bias with handy support levels.


By Saniya Mehra