The Hindu Business Line : Focus is on Budget, Bush

This week market will be focused on the cues from the Budget and Mr Bush. Despite certain apprehensions regarding pressure on the cost of equity investments, Dalal Street put a strong bet on the expected positives through tax proposals and incentives, which may be offered by the Budget.

The macroeconomic elements such as the range of fiscal and revenue deficits have all been factored in.

Willing suspension of disbelief

The liquidity flow and actions in the derivatives market also suggested that the market would like to believe positives would overweigh the negatives, if there are any.

In terms of deployment of funds, FIIs last week were not only net positive, but the quantum was also much higher than the previous week in the cash market. The domestic mutual funds continued to book profit more than the fresh investments they made.

The contrasting short-term strategy between the two groups, however, did not give any indication of a change in their medium-to-long outlook for the equities.

The local or overseas investors appear unhesitant about Indian equities, which are getting costlier by the day.

International money flow into the emerging markets equity funds, including India - specific funds, moderated a bit in the week ending February 15, after the previous week's all-time record.According to Emerging Portfolio Fund Research (EPFR), India-specific funds, tracked by the monitor, now have more than $13 billion in total assets. The BRIC funds, in which Indian equities figure prominently, have also seen huge inflows in recent months. Asia (ex-Japan) funds increased their Indian holdings during December 2005 to their highest average weighting since the first quarter of 2000. Funds tracked by EPFR have been net buyers of the Indian equities in four of the last six months.

Global emerging markets (GEM) equity funds, however, are currently underweight in their allocations to India. And their cash weightings are at five year lows - traditionally a bearish signal.

Localised impact

If the market gets a shock from Mr Chidambaram through measures such as limited long-term capital gains tax relief, the response is likely to be immediate negative.

But, the market sensitivity to such negatives may be more of a localised kind - only in the affected stocks.

On the other hand, positive reactions are also likely to be related to the specific counters and sectors.

Since the market has already priced in many of the "could-be-proposed" goodies, further valuation adjustments would depend on the actual triggers.

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