The Hindu Business Line : `Global trend to drive sentiment'

What's in store
Markets to remain rangebound in near term
Rally continues to be narrow
Valuations appear full, little possibility of re-rating from these levels

Mumbai , Nov. 3

With the euphoria over the Sensex and the Nifty dying down, marketmen anticipate some amount of turbulence in the near term. The sentiment, however, continues to remain bullish.

October saw the Sensex cross the 13,000-mark to gain 4.1 per cent, while Nifty gained 4.3 per cent. FIIs remained net buyers for the fifth consecutive month, with October seeing the second highest FII inflows in the current year.

FIIs pumped in $1.36 billion in cash and sold a meagre $0.13 billion in futures in October. Over the past three months, FIIs have bought more than $3.72 billion in the cash market and sold $1.41 billion in the futures segment.

Global cues

According to Mr Andrew Holland, Managing Director, DSP Merrill Lynch, going forward, global cues is what will drive liquidity in India.

"Besides India, globally all markets have touched new highs. Worldwide liquidity is very strong. However, signs from the US are mixed, so there is some amount of nervousness," he reiterated.

Domestic mutual funds continued with their wait-and-watch approach with a marginal investment of $7 million in October (this, despite a cash balance of $1.4 billion with all equity schemes combined in September).

"The 13,000-mark was just a sentiment driver. You should not base your investment decision on this but keep your eye on the bottomline of companies," says investment strategist Mr Gul Tekchadani.

Given corporate India's growth, Mr Tekchadani believes the investment cycle looks good. "However, going forward, the question remains as to how the Government will attract further capital as we need almost Rs 30 lakh crore over the next five years," he said.

He is of the view that external factors (political event or natural calamity) could impact market sentiment in the future. "I am bullish on India for the next eight quarters," he said.

Mr Sunil Jain of Edelweiss Securities expects markets to remain range-bound in the near term.

The reasoning being second quarter results, though robust, were broadly in line with expectations and mostly factored in. While being optimistic on earnings growth, he remains cautious on valuations.

Rally, narrow

According to Mr Jain, the rally in the market continues to be narrow.

Despite Sensex and Nifty breaching their all-time high level, the BSE small-cap and mid-cap index are ruling 17 per cent and 10 per cent lower than their respective highs.

Among Sensex stocks too, only 11 stocks contributed to around 70 per cent of the rally from the lows in June (Infosys, ICICI Bank, Reliance, RCOM, Bharti & ITC were prominent counters).

Around 70 per cent of Sensex stocks are already ruling within 10 per cent of their May 11 prices, in comparison to the BSE mid-cap and small-cap index, where only 45 per cent and 27 per cent of the stocks have reached that level. Over 40 per cent of Sensex stocks have crossed their May 11 price, against a meagre 22 per cent and 16 per cent for BSE mid-cap and smallcap index.

"Prices of most of the companies have not been moving up after the second quarter results (Infosys being an exception). Valuations in the near-term seem to be full and there is little possibility of further re-rating from these levels. Any threat to corporate profits going ahead (rising commodity prices, interest rate etc.) could add to the woes. We do not see any strong trigger to drive the markets from here (unabated FII flows could lead to a continued rally) and hence, conclude that risk-reward ratio favours remaining short to neutral," said Mr Jain.

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