The Hindu Business Line : Profit-booking may push indices downwards

Dalal Street avoided continuation of a corrective phase last week, particularly for the Sensex, thanks to substantial short covering. This week, chances of a repeat of a large-scale short-covering are dim. The broad indications are of a possible downswing stand.

A big section of investors is not feeling comfortable and are showing tendencies to book profits. Available liquidity on the ground is not flowing as easy as it should be to sustain an upward market momentum.

The market needs covering up of its current weakness to achieve a sharp upward spike. It requires flow of news boosting sentiments to maintain an assurance that everything is fine in the short- to medium-term. Otherwise, negative news and cues – economic and corporate – may be heeded more on the Street.

Last week, soothing words from the Union Finance Minister, Mr Pranab Mukherjee, on further stimulus dose – and the Cabinet decision on 10 per cent divestment in profit making public sector units – had positive effects on the market psychology.

Out of 419 public sector companies, 51 are listed on the exchanges.

A substantial number of the 368 unlisted PSUs will qualify for listing on profitability clause.

What appears important is that the market, which accorded lower PE multiples for PSUs against private companies, is showing willingness to do otherwise.

Some say that a major unwinding in dollar carry trade is in the offing and it may end the equities bubble in emerging markets. It is accepted that the leveraged money through dollar carry trade (often at a subzero rate) has been driving the recovery in the emerging market equities. This, however, placed equity asset values at a high risk.

But indications from dollar valuation vis-À-vis other currencies and interest rates have not suggested a game change. A section of global currency experts say that dollar carry is unlikely to be hit in the immediate term.

According to analysts polled by FX Week, a rise in dollar interest rates is unlikely to lead to a frantic scramble to close out short dollar positions.

According to market intelligence, during the recovery since March, Dalal Street has received a fair share of this carry trade money.

To that extent, valuations of local key indices are vulnerable to the changes in the global carry trade-induced investments. However, insiders suggest a corrective phase may set in here without the hiccups in the dollar carry trade.

(Responses may be sent to jayanta_mallick@thehindu.co.in)