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A. Roy Chowdhury

A file picture showing delighted investors at a share trading office in Kolkata –

Money flow returned in moderate doses last week sensing an approaching bottom-out on Dalal Street and helped buoy the indices up almost to the levels before the global credit crunch pushed them down in the three weeks beginning July 24. However, liquidity may tend to be restricted initially and volatility is likely to go up this week after weak US closings on the weekend.

The strategists have started experimenting with fresh investment game plans balancing caution with opportunism. The equity valuation being relatively low, lure of higher returns overtook the risk factors temporarily.

Allocation taps were reopened and churning of portfolio was also used to prepare for a gear reversal, if need be. The small-cap stocks recovered more ground than the mid and large cap counters as players, including retail ones, looked for bargains. Traders, mindful of a technical breather, hastened the process further.

But, short-term considerations still rule the Street psychology and investment tactic. A number of the players are yet to re-enter. Some are just nibbling. Current responses of various groups of investors broadly suggest that the market is close to an inflection point.

As headline worries keep on fluctuating in the short term, the core worries form the under current and influence strategies quietly. For example, Morgan Stanley, which has raised emerging market equity weighting in the last week of August and began to reinvest some of the cash it collected in June and July, appeared cagey about Indian equities on apprehensions over slowing domestic growth and, hence, corporate earnings growth. Messy politics and a re-pricing of risk also bugged it. The “reflexivity” it observed between India’s macro growth and share market performance concerns it too. “If the ongoing correction is prolonged, its effects will spill over into the real economy and then cause a vicious circle of lower growth and lower share prices”, it said in recent note.

“We worry less about politics right now as we think the market will quickly price in a mid-term poll and the populist measures that follow the announcement of an election. Our deepest concern is that the world may be re-pricing risk more permanently than it has in previous re-pricing efforts of the ongoing bull market. A re-pricing of risk will have its attendant impact on India’s growth rate over the next 12-18 months with consequences on equity share prices. The fact that corporate balance sheets are geared to asset markets only reinforces the reflexivity between share prices and the macro. There appears an immediate risk to earnings in the coming season”.

Although valuations are off highs, it feels, they are still rich and fundamentals seem to be slipping. India has been struggling to outperform other large emerging markets year to date (August 28) and this could continue in coming months notwithstanding the out-performance India has delivered during this correction, it writes.

Before the market re-establishes that it is indeed iconic – relatively immune to global hiccups, domestic economy management and earning growth are on rails – a myopic view would dictate investments in the next few weeks and blur the possibility of 16,000 on the Sensex.

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