The Hindu Business Line : Benchmarks may turn choppy

According to Emerging Portfolio Fund Research, demand for emerging market equity funds in the first two weeks of August was strong with fresh money streaming in. These funds posted their first back-to-back weekly inflows since early May after generating positive returns of 11.5 per cent in seven of the previous eight weeks.

Anatomy of recovery

The Indian equities have made a remarkable recovery since the meltdown in May. India is still the best bet, even among BRIC, for global portfolio investors in terms of returns in the last one year.

A popular close-ended exchange traded fund, India Fund Inc, was fetching a premium of 30 per cent in January in US, is currently attracting a premium of 9.60 per cent on a one-year market return of 25.82 per cent. It has recovered from a year-low of $33.50 in May to $40.66 on last Friday. In early July, it was quoting at $47 compared to $30 early in July 2005, marking a premium under 5 per cent to the underlying value.

During April-June quarter, the market capitalisation of the Indian benchmark Sensex, however, remained down 12.72 per cent compared to the previous quarter.

In the quarter to June 30, 2006, the market cap of the Chinese, Brazilian and Russian benchmark indices performed better than the Sensex. While China posted a gain of about 31.24 per cent, the Russian index moved up by 8.87 per cent and Brazil's gain was 1.17 per cent.

The quarterly data from aggregate BSE-200 companies' sales growth (excluding energy companies) accelerated to a new high of 28 per cent Y-O-Y during the quarter ended June 30, 2006.

"The heavy-weight material sector, which grew at 34 per cent, contributed to 53 per cent of the acceleration in sales growth over the previous quarter. This sector contributed to 5.5 percentage points out of the total 10.4 percentage points acceleration in the metals sector (reflection of higher volumes and prices)," according to two Morgan Stanley economists - Mr Chetan Ahya and Mr Mihir Sheth. Cement, utilities, consumer discretionary, engineering and construction sectors also helped a sharp bounce-back.

Domestic demand, aided by a sharp rise in bank credit (a record 33 per cent), and a protection against hardening of crude price in the global markets have fuelled the recovery.

If global capital inflows remain steady, the RBI may dither in allowing absorption of this liquidity as it remains concerned over inflation and the banking system's ability to avoid a quality problem, Morgan Stanley economists feel.

Unsustainable?

Some experts tend to conclude that the economic growth acceleration witnessed in the first (April-June) quarter may not be sustainable. The lurking fear is that the credit cycle may reverse in the medium-term in the backdrop of the lagged effect of the steady rise in real interest in the past few months, increasing supply constraints in banks' balance sheet such as low deposit growth and the RBI's measures to control aggressive credit by increasing risk weights to select sectors. As a result, the corporate earnings growth may also flag in the next few quarters.

Apprehension of lower profits may also come into play for increase in provisioning for depreciation as an aftermath of widespread capital expenditure undertaken by India Inc.

The extended hypothesis suggests that a weaker trend in external demand, government and household spending may cause a slowdown in growth in July-September quarter.

India unlisted

Long-term investment strategists, however, are not looking only at corporate numbers or shift in stance over disinvestments.

For the fund managers, India unlisted, be it rising suicide score among farmers, or burgeoning English speaking upwardly mobile consuming class, are equally, if not more, important.

According to investment advisor Mr Jeremy Siegel, underneath the surface, India's ledger is lined with pluses that compensate for its minuses. Recommending Indian equities as the long-term destination for the global money, he suggested the India's deficiencies, for example, in "hard" infrastructure, are likely to be growth drivers in the next few years.

Short-term game

After substantial buying in heavyweight stocks in the last four weeks, the long-term players and market markers seem to have turned their focus on mid-and-small cap stocks.

This week, the benchmark index may turn choppy. The strong support level for the Sensex, however, could be around 11K level. The domestic liquidity, however, may push the mid- and small-cap indices a little further ahead.

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