The Hindu Business Line : Market may see uneven but secular rally in 2007: SBI Cap

The market rally that swelled the pockets of investors in the last three years will continue in 2007, going by the projections of market pundits. Though the rally may not be as mouth-watering as it had been these three years, experts feel that the market will certainly continue its northern sojourn, if the internal and external risks in the system are dormant.

Market men feel that volatility will play its role. "There is likely to be an uneven but secular rally, with all stocks coming back in action," Mr V. Gopianthan, Managing Director, SBI Cap Securities, feels. Valuations of stocks will remain on the higher side with the current PE for the year at 22.84.

Consolidation will be the major trend once Sensex touches the 15,000 mark, the experts say. "There's continued momentum on the upside and, for the short term, markets will consolidate. They will pick up steam from the first quarter results next year," said Ms Shahina Mukadam, Head-Research, IDBI Capital Markets Services Ltd.

BSE Sensex gained 47 per cent in 2006 (till December 28) with a P/E of 22.84. Though valuations of stocks are not cheap, the linear and secular trend in the India growth story next year will dominate.

Experts voice similar expectations and concerns from markets for the next year. Volatility is inevitable and returns will tone down, but corporate performance will be impressive, fund inflows will continue and top gainers will be from the mid cap space— this is how experts seem to sum up their projections for 2007.

However, market movement may be interrupted by a possible slowdown in the US economy and crunch of liquidity in our system.

"Sensex should end in between 15,000 - 16,000 levels next in 2007. Markets should continue their upward trend next year as corporate performance is expected to be good," said Mr Amit Rathi, Managing Director, Anand Rathi.

Fund inflows in the country will help markets to touch newer highs. "A slowing US economy and weakness in dollar are the two prime reasons for the US flow seeking relative safety in the US large caps and emerging markets," said Mr Amitabh Chakraborty, Business Head, BRICS Privileged Client Group. He added, "with China making to the investment grade of calPERS investment basket, we believe FII flow in India will at best match 2007, as China continues to attract fund flow based on strong currency and higher growth."

Domestic funds are also expected to pour in money in equities in the beginning of next year. "Mutual funds are currently sitting on Rs 4,500 crore cash collected recently via new fund offers which will enter the markets in January. This will lead to higher volumes in the beginning of the year," said Mr Ajay Bagga, CEO, Lotus India Mutual Fund.

However, 2007 may not give as high returns like this year at over 40 per cent as markets grow more mature. But returns can appreciate if a stock selective approach is followed. "Markets will give 15-20 per cent returns next year in line with corporate performance," said Mr Bagga.

"Valuations will not be cheap as markets should end between 16000 - 16500 levels next year," said Mr Krishna Kumar Karwa, Managing Director, Emkay Share and Stock Brokers Ltd.

Mid caps and small caps will show increased participation. "Midcaps will outperform, partly because many of them have relatively under-performed the Sensex in 2006 and most of them will continue to surprise the market with superior earnings," said Mr Chakraborty.

However, a few threats may introduce a pause in the secular rally feel experts. "The external threat to markets could be a slowdown in US economy while internally, if RBI tightens liquidity in the system, markets will be affected," said Mr Rathi.

Mr Gopinathan said credit may tighten as the economy prospers.

Other internal risks will be large number of issues in the primary markets. "Initial Public Offerings should not pose a huge threat if the quality of the issues is good," said Ms Sandeepa Vig Arora, Vice-President, India Infoline Ltd. She added, "If there is over heating in commodity asset prices, it may put pressure on margins in terms of profitability."

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