Indices may stick to a range for short term

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Foreign investors' interest remains.

Positive note:The nation seems to be in a better position among the emerging economies. The consumption story continues to surprise the global investment community.
Positive note:The nation seems to be in a better position among the emerging economies. The consumption story continues to surprise the global investment community.

Jayanta Mallick

Dalal Street seems to be entering a short-term zone of sideways movement. This week, the key indices may manifest this trend through moderate profit-booking and fresh entries. There are still signs of appetite among the overseas investors though strategies reflect growing resistance to higher premiums.

The India story – high GDP growth, higher interest regime, and one of the highest equity returns in the globe — has not been sullied so far by the brewing global tension over probable currency and capital controls in the emerging markets. The local equity valuations are yet to indicate a bubble.

As the investment horizon has not extended meaningfully to broader market during the current rally, there is room for an intermediate strategy for horizontal expansion.

Issue related to the global economy is likely to take time to get resolved. The IMF-World Bank meet and related bargaining joints on the sidelines are unlikely to provide a breakthrough in finding acceptable ways to address the core issue of global economic recovery.

But as the debate over pace of recovery, asymmetry in valuation of currencies, capital control, reshaping financial market architecture continues through the next month's G-20 meeting in Seoul, the spirit of global cooperation — evident during the 2007-2009 financial crisis — is likely to wane.

Amid an ensuing war of nerves, India may find itself in a relatively better position than other emerging economies. While yuan valuation issue will put China under pressure, Brazil's capital control measures will make global investors ponder. On the contrary, a “watchful” India indicates that it may welcome foreign retail investors to participate directly in its grand party.

India's low-leverage market is likely to attract more players of the ‘shadow banking system', run by non-bank institutions such as hedge funds, pension funds, money market funds and insurance companies.

The local consumption story continues to surprise global investor community. The price multiples for Indian equities are being placed on 2011-12 expected earnings. The broad earnings expectations, however, suggest a likely evidence of pressure on bottom lines in the June-September quarter of this fiscal itself, despite stronger YoY growth in revenues.

The rising input costs and higher provisioning costs for banks may reflect tepid margins in the second results.

A preview by ICICI Direct says: “Banking and non-banking companies are likely to see muted growth in both EBITDA as well as PAT on a QoQ basis. On an absolute basis, however, the numbers are likely to be satisfactory in Q2FY11E.

“As per three-month returns perspective, banking, realty and metals have given the highest returns while, oil and gas, power and healthcare were the laggards in terms of returns.”

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(This article was published in the Business Line print edition dated October 11, 2010)
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