Financial Daily from THE HINDU group of publications
Monday, Dec 26, 2005
Financial Daily from THE HINDU group of publications Monday, Dec 26, 2005 |
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Stock Markets Markets - Outlook Columns - A Ringside View Lower liquidity, higher volatility likely Jayanta Mallick
IT is hard to keep a performing market down. The Indian stock market seems to have overcome the concerns about overvaluations. Through 2005, the market has progressed to scale new heights. Looking back, one realises how short-lived the corrections were compared to the big gains recorded. Last week, before the year-end holidays held out a promise that despite short-term volatility, the optimism is intact. Though the domestic mutual funds were on the profit-taking mode, FII investment figure suggested net buying and a fairly strong activity. Overseas funds appear to have brushed aside apprehension of a speculative bubble. Float of new India-specific equity funds abroad continues. JP Morgan Fleming Asset Management (Japan) has launched another fund directed towards Indian equities for the Japanese investors. On the other end of the globe, in Europe, India Capital Growth, an investment company backed by Caledonia Investments, is offering access to Indian mid- and small-cap stocks. Allianz is reported to have planned a fund, which would have significant India exposure. Deutsche Asset Management, which had marketed an Indian equity fund at $175 million in Japan, expects that it would grow to $900 million by the end 2006. Focus on mid/small-cap stocks: According to overseas fund managers, Indian equities may witness much higher interest across the world in 2006 than 2005. It is now clear that some of the overseas funds are feeling comfortable going beyond the Sensex and the Nifty baskets. The year 2006 may unfold a new chapter in investment strategies in mid and small cap stocks. Killik &Co, a UK investment firm, has suggested that investment in Indian mid- and small-cap stocks, which were normally avoided because of being under-researched, may prove to be the right asset class to duck the potential pitfalls in investing in the Asian equities. Bubble?: However, sceptics are still not convinced. An all round appetite for and continuous launches of India-dedicated funds have prompted some to suspect that Indian market may have peaked or close to the peak and a serious fall is imminent. The principal fear is that expanding investments in Indian securities may not contribute to the increasing productivity, but inflate stock prices. According to Mr Yuko Nishikawa, senior economist of the Japan Center for Economic Research, a torrential influx of capital into Asian countries where the scale of the stock market is small and not appropriately developed, can prompt market confusion, running the risk of shaking the very foundation of the macro economy. "This recalls events in the wake of the Asian financial crisis of 1997-98, in which Japanese banks made major cuts in their financing in Asia. As it turned out, Malaysia and other countries were sharply impacted by these moves, with their recoveries from the crisis delayed," he recently observed. Thorough homework: But a growing number of global capital market players feel that interest about Indian equities go beyond the surface. Retail investors abroad are digging deeper than GDP growth, interest, tax and inflation rates, and even IT sector growth including spectacular return it provided in 2005. Equity managers and marketers were surprised at the level of homework small investors have been doing abroad before punting on the so-called "India story". They seem to be aware that without big ticket reforms the Indian corporate sector has performed better than its counterparts elsewhere. The reservations about the securities related Indian laws are also being replaced by acceptance of a fast maturing capital market. This week, Dalal Street is likely to see lower liquidity and higher volatility owing to restricted participation and end of F&O settlement period. A short-term blip may not, however, change the sentiment dramatically.
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