The Hindu Business Line : `Market rally not broad-based'

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Thiruvananthapuram Jan. 26 The present rally in the stock markets, after the crash in May-June 2006, is not broad-based and only a handful of stocks in select sectors are taking the markets up, according to Mr V. Rajendran, Managing Director, Capstocks and Securities.

In Sensex, which has been galloping, it can be seen that only half of the 30 stocks, most of them from the service sector, have significantly moved ahead of the highs they reached in the beginning of May, before the correction set in, Mr Rajendran said.

Then there was a virtual shakeout among the midcaps and small caps and a lot of them are still trading at much lower prices than in April-May 2006. However, in the long term, these stocks will out-perform the frontline companies as most of the latter are almost fully valued.

If one looks at the growth of NSE midcap index and Nifty from the beginning of the present bull phase in April 2003 till date, it can be seen that while the midcap index rose by around 650 per cent, the Nifty moved up by only 330 per cent. This indicated that over a longer time-frame, midcaps out-performed frontline stocks.

Relentless rise

There are many reasons for the relentless rise in the markets. The Indian corporate sector is doing extremely well, with companies posting better than expected results. A sustained GDP growth of 8 to 10 per cent is now accepted by everyone and the Foreign Institutional Investors (FIIs) are continuing their buying spree.

The FIIs, having sold around $3 billion worth of stocks during the market fall, have now bought back around $6 billion. And the PE ratio of the Sensex is again above 22.5, arguably over-valued.

But, it has to be noted that the Indian economy is in a long-term growth trajectory that is likely to continue for several years to come. The markets are also in a long-term bull phase and an index target of 25,000 by 2010 appears within reach, Mr Rajendran said.