The Hindu Business Line : Their advice is caution

WITH the benchmark indices hovering just below their record highs, market participants are turning cautious. Technical corrections notwithstanding, there are also concerns about hedge funds and other foreign investors diverting money out of the secondary market.

Though the sentiment in the bourses is positive and a section of the market sees a continued run up in the indices till the announcement of the Budget, brokers and analysts are advising clients to be very choosy about the kind of companies that they are investing in.

"If investors are looking at a long term horizon and have the courage to see through a slump, only then should they invest. The run up recently has been largely liquidity driven. When corrections happen, the knock could be anywhere between 20-40 per cent," said Mr Gul Teckchandani, Investment Advisor and former Chief Investment Officer of Sun F&C.

Primary concerns about foreign investors' liquidity hover around the two big ADR and ADS issues of Infosys and ICICI Bank. The Infosys issue is worth $1 billion and the ICICI Bank is valued at $300 million. Adding to this are the big public offers expected to hit the domestic market, including Jet Airways.

A lot of money from hedge funds and others who invest in India through the participatory note routes may get diverted to the ADR and ADS issues, said Mr Andrew Holland, Executive Vice-President, DSP Merrill Lynch.

The debate in the market currently is of when the corrections are due. It is not rare to hear references of the Sensex touching 7000-level before the Budget. But, institutional investors are not convinced about this movement and put this down to "irrational exuberance" of market participants.

" On the downside, the Sensex could go as low as 6100 before the Budget," Mr Holland said.

Taking a contrarian view, Mr Amitabh Chakraborty, Vice-President and Head Research, Kotak Securities, is optimistic about the markets . There is sufficient liquidity and the market is expecting another `dream' Budget. Market sentiment is poised on the good indicators coming from the Government, such as allowing EPF investment in equities etc. "We are optimistic even though there has been a sharp run up," he said.

The reason for FIIs and institutions to be pessimistic about the short to medium term is because of the lack of a good round of corrections. The Sensex has had a steady climb since May 2004 and touched its highest levels on January 4, 2005. Though there was a fall subsequently with the Sensex moving to 6102 level on January 12, it clawed back almost immediately and closed for this week at 6618.

"When there is a correction, you will always be able to feel it. Markets will stay low for a much longer period of time, unlike January where there was no buying for only a couple of weeks. While the mood now is ebullient and nothing is impossible, it is not probable that the market continues to zoom up irrationally from these level," Mr Teckchandani said.

Valuations are also on the higher side and foreign investors have many cheaper options across the globe, not just in other South Asian markets.

New Zealand, South American and other emerging economies are fighting with Indian for a share of the global money.

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