The Hindu Business Line : Mid-caps may outperform blue chips

Dalal Street indices did move up with heightened volatility last week. The net overseas investment flow was further reduced to Rs 460.14 crore (including Friday's provisional figure) from over Rs 2,000 crore. The local mutual funds continued to be net sellers. Obviously, other sections of the investors lent their might to push the benchmarks and minor and sectoral indices.

A strong liquidity flow has brought the Sensex within a sniffing distance of 14K. There is strong possibility that some of the investor groups would like to take profits in frontline counters at this level of benchmark. But, this may not necessarily trigger a serious correction in the Sensex and Nifty unless overseas liquidity turns decidedly negative. However, in the immediate term, second rung stocks may outperform the blue chips.

Number of registered FIIs in India has come close to a thousand, to be precise 993 as on November 30, 2006. In January this year, the figure was at 833 and in January 2005, the number, put out by SEBI, was 655.

Emerging India

The trend suggests that short-term negatives are unlikely to deter these new players from making fresh entries into Indian equities. The prevailing perception in the international fund circles about Indian stock is something like this: India, along with Brazil, Russia and China, already accepted as a proxy for global emerging markets, will be the future engines for global growth, with an ever-increasing share of global GDP and trade and growing political importance.

On the other hand, the general apprehension was that the US GDP may finally grow by 3.5 per cent this year, but slow to two per cent or less next year, as the housing downturn results in slowing consumer spending. As a result of a softer consumption environment, business investment will slow as well in 2007, leading to a general economic slowdown. This may happen irrespective of what the Federal Reserves does.

According to Mr Dave Bhagat, Senior Strategist, SVB Silicon Valley Bank's Product Advisory Group: "While the BRIC countries may dominate the world of emerging market in terms of size and growth, their differing profiles are illustrative of the challenges faced by all emerging market economies in response to a US slowdown. Clearly, the impact on each will be a function of its reliance on exports to the US and the mix of those exports. The countries with a larger proportion of consumer products, in particular large ticket discretionary durables, will be far more vulnerable".

There are two factors that favour most structurally sound emerging market countries - those with sound fiscal policies and trade surpluses.

Compared to a few years ago, India's economy is considered better developed and more resilient, with added focus on infrastructure and robust domestic consumption. Expectations are that these may give India a better chance of withstanding external disruptions. The other advantage is that its currency is cheap compared to the $, which, factoring in the external deficit, is extremely overvalued against the emerging market world.

Pessimism index

The Dun & Bradstreet business expectations survey for the 2006 October-December quarter found that the Indian corporates' business confidence has increased on all optimism indices - sales volume, net profits, selling prices, new orders, inventory levels and employees - from the previous quarter. However, market analysts are keenly watching emergence of socio-political tensions over the issues related to development, growth and the choice of road to reforms.

Many of the overseas funds, which have or intend to have significant stake in the Indian equities, are studying these aspects more carefully than ever before. Be it the influence of Maoists or extremists, or the response of state power to the communal violence, or the impact of caste equations on the political elite and their policy decisions, or the issues related to human rights and ecology: analysts are quietly preparing reports for the consumption of the overseas investors.

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