The Hindu Business Line : Another decisive phase in market

The market action during the week had all the elements of a Bollywood potboiler. Marked by extreme volatility, the stock market alternated between bouts of bearishness and bullishness, the Sensex plunging 400 points in the first two trading sessions, only to stage a remarkable recovery of nearly 300 points and slump again by another 100 on Thursday. The edge-of-the-seat drama began when SEBI passed an interim order on the IPO scam barring 24 brokerages from carrying on market operations. As confusion prevailed among retail investors over their ability to trade with some of the banned brokers, such as Indiabulls or Karvy, the market opened with a 490-point drop on Friday's session. But once the regulator clarified that retail investors could carry on normal trading, the market pulled back from the brink in the first hour of trading and ended with a modest gain of 17 points.

Market analysts and chartists who have been talking in terms of a correction from the 11,000 levels have been befuddled by the strength and depth of this rally. As the market enters yet another decisive phase, a few key factors are likely to hold sway over sentiment:

The earnings picture

Among Sensex and Nifty constituents, the earnings announcements from the early birds for the latest January-March quarter are encouraging. Reliance Industries, Gujarat Ambuja, ACC and Bharti Airtel have all turned in a solid financial performance, which has been above market expectations in some cases.

Infosys Technologies, Satyam Computers (relative to TCS and Wipro), Ranbaxy Labs and Hindustan Lever have turned in a weak performance in the latest quarter. But strong guidance from Infosys, a string of acquisitions from Ranbaxy and robust demand for FMCG are likely to attract interest in stocks from software, pharma and FMCG stable.

Liquidity play

This liquidity-fuelled rally continues to be dominated by fund flows from FIIs and mutual funds. Unlike the earlier months, April proved to be a choppy month for FII flows. Till April 27, FIIs were net sellers to the cccctune of almost Rs 2,000 crore.

On April 28, FIIs stepped into the market in a big way, with net purchases of Rs 2,514 crore, swinging their flows back into the black for the month. In stark contrast, mutual funds that have been sitting with new fund offer resources of nearly Rs 20,000 crore have filled the void with a net purchase of Rs 3,000 crore in April. If retail participation swells, it will ensure that liquidity holds sway over market direction.

The positive push

Companies have engaged in a number of smart moves to compete globally and unlock value for shareholders. The flurry of cross-border acquisitions, such as Subex's recent acquisition of Azure, a host of companies unveiling plans to use surplus land for commercial/residential purposes (for instance, Rashtriya Chemicals, Unitech, Bombay Dyeing, MTNL and Mukand Realty), and the demerger of operations by companies such as Hinduja TMT or Zee Telefilms are providing a positive impetus to financial growth.

The Government has also cleared Rs 1 lakh crore of investments in special economic zones (for IT/ITES and manufacturing sector), which are expected to fuel brisk infrastructure growth across the board.

The wild cards

Three key variables are likely to influence market direction in the near future. One, surging metal prices are expected to put pressure on input costs for the auto and capital goods sector. If crude oil prices continue to rule above $65-70, the Government will have to take a call on hiking oil product prices. It is likely that it will consider such a move post-Assembly elections in May. Any hike is likely to push up the input costs for different sectors and fuel inflation. With the firming up of interest rates at the global level, rates are beginning to harden in India too. Any sudden spurt in interest rates, above 1-1.5 percentage points will impact the stock market significantly.

Krishnan Thiagarajan

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