The Hindu Business Line : It's up, up hurrah, thanks to fund flow

IF all time highs in the local benchmarks are in currency, there is no reason why the Chinese currency appreciation will not recharge the market psyche. Given the current overseas and local exuberance over the domestic equities, possibilities of a deep correction and bearishness in the key indices in the short run are unlikely.

Money screams: A phenomenal money flow has been making the indices break the resistances with screaming headlines. The words of wisdom and caution are likely to be swept away by the sheer volume of flow.

Last week, foreign institutional investors' flow improved even further over the previous week and the local mutual funds continued to be in the bandwagon, which they just joined in the last two days of the previous week. The traders, speculators and retail investors are thronging Dalal Street with their purse string open.

While a section of the market players is happy with paper profits, others are taking profits and reinvesting in the market only. So, money is drawing in more money to build a nice spiral.

The apprehensions of a bubble getting bigger, however, may be lurking in the minds of the people who have not yet dipped their toes in the bull market. The valuations in the stock market never shadow the fundamentals, at least not in the same way. The correlation between the value and fundamental of a stock in particular and the market in the general has always been buffered by a subjective element called sentiment.

The investors are in the mood to pay higher P/E now and fresh money is constantly revising the prices upwards.

On the one hand, the emerging market funds are continuing to receive money from all over the world through June and July, and on the other, these funds have outperformed the other global and geography-specific funds in terms of returns in May, according to the latest data available with Emerging Portfolio Fund Research (EPFR), which tracks 8,000 international, emerging markets and US funds with more than $4 trillion in equity and bond assets.

The research house said the emerging market assets proved their resilience and overcame a global backdrop of slowing global growth, tightening US monetary policy and the rising dollar. These have historically been bad for the emerging markets. The resilience reflects the dramatic improvement in economic fundamentals of the emerging markets such as India, China, Malaysia, Brazil and South Africa. All these indicate a possible re-rating of equities of these markets relative to their global peers.

In the current disposition, it would require either a serious political or economic disruption in the domestic or overseas markets or a strong barrier to hold the fund flow to domestic equities. As none of these is on the horizon, the party on the Street may continue with technical and minor breaks.

Showstoppers: The mid-cap and small-cap stocks are likely to sizzle even though some of the mutual funds stop taking in fresh money for the dedicated schemes in this category. In fact, a very large chunk of the current liquidity is likely to be attracted to the counters beyond benchmarks. A huge number of stocks have been moving up not only on speculative interest but real improvement in the fundamentals.

In the past one year, quite a number of stocks have crossed the small-cap threshold of Rs 1,500 crore (equivalent of internally acceptable benchmark), while a host of counters is knocking at the door of the big league beginning from the market capitalisation of Rs 4,000 crore.

The transformation process is visible despite incomplete market reforms and not so enthusiastic progress in corporate governance.

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