The Hindu Business Line : Pivotals may maintain uptrend

THE benchmark indices, as expected, closed higher last week and created new peaks. This week the Sensex and the Nifty are likely to move up fuelled by strong to moderate liquidity.

Despite fairly widespread perception that the local equities are now costlier than many in the other emerging markets, the continuation of a decent flow from the overseas funds has been denying any serious correction of late.

Compulsion for a large majority of FIIs stems from low risk premium, higher growth potential for India as a whole and continuation of low return regime in the developed markets. It is expected that in view of losses caused by hurricane Katrina, possibility of wider Budget deficit and low consumer confidence, the US Federal Reserves may not hike the interest rate more than 25 basis points this week.

This may mean status quo in terms of global investment flow. In the last couple of months, fresh flows have been distributed largely between a few Asian and Latin American emerging markets in varying degrees. But the quantum of the flow to India has more or less remained steady. In the process, the benchmark indices have been relatively over-owned by foreign investors. But constant churning among the overseas players has not allowed a stranglehold of a few on the blue chip stocks.

Local players, however, appear to have yielded a great deal of a place to their foreign counterparts to determine the valuation of the benchmark stocks.

In case of non-benchmark stocks, the market seems to be gradually developing its resistance in terms of further growth in valuation. There are instances of correction or consolidation in some individual stocks. But a broader correction encompassing majority of the mid- and small-cap stocks may not be far off.

The apprehension that valuation of certain small stocks is manipulated is growing. The regulators have yet to identify any culprit and clear the air of doubt. But many in the retail segment seem to withhold the instinct to push valuations beyond fundamentals.

In stock markets, generally perception influences events. But often it is the other way round when certain events change the overall perception. However, it's a matter of time and hard to predict the precise moment.

As a strategy, it is fair to anticipate a correction in the small- and mid-cap stocks, particularly those which have gained substantially recently and kissing their all time highs.

The new ideas of investment in this space are being expanded with news of turnaround, new orders, expansion and even little understood carbon trading prospects. If some of them fail to live up to the expectations, the sentiment may turn negative for many.

As things stand now, a clear disconnect in outlook may occur between blue chips and the rest. The fundamentals are expected to rule. The quarterly results to September for the smaller stock could be crucial for the sustainability of their market valuation.

Interestingly, for some pivotals accumulation carbon trading points may become a trigger in the near future. So far the noise regarding carbon trading has been restricted to some small-cap stocks. It is understood that companies such as ITC is seriously looking at the possibility of encashing such points since its social forestry programme has been gathering paper credits for it so far.

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