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Market may see an end to downtrend

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Recent nervousness stemmed from overplay of momentum game

BUSY DAY: A file picture of one of the recent crashing days at SMC Investments Solutions and Services, a share trading house in Kolkata - A. Roy Chowdhury
BUSY DAY: A file picture of one of the recent crashing days at SMC Investments Solutions and Services, a share trading house in Kolkata - A. Roy Chowdhury

JAYANTA MALLICK

If macro investment moves reflect collective psychology, then long-term investors are likely to turn the tap on and call an end to the bearish sentiment for the short run.

This week the downward drifting in the domestic market may halt. After about a month-long valuation readjustment phase, compulsions for buying seem to have grown more than for selling. Opportunity cost has gone up substantially on Dalal Street in the recent weeks of correction.

If macro investment moves reflect collective psychology, then long-term investors are likely to turn the tap on and call an end to the bearish sentiment for the short run.

Continuation of a herd mentality - profit taking or remaining largely in cash - does not help in a falling market after a point. When everyone booked profit at every bounce-back and looked for an elusive bottom-out level at the same time, prices dipped. The negative sentiment has hurt everyone in the process.

Though, domestic investors collectively did not match up to the volume of unloading by the overseas investors last week, Friday's sharp upswing in the Sensex indicated it was no longer paying for the FIIs too.

Theoretically, liquidity meant for the equities was not in short supply, the supply of stocks outstripped demand. But it became clear that psychologically, domestic investors, including mutual funds, financial institutions, high net-worth individuals and corporate treasuries, were not fully ready to take the opportunity provided by the falling market P/E.

Data provided by the SEBI suggests that in 15 trading days - from May 11 to May 31 - FIIs were net sellers to the tune of Rs 11,953.70 crore. Local mutual funds, during the same time pumped in net investments of Rs 7,030 crore.

The current investment trend, pursued by these two major groups of players, points to the fact that the so-called long-term investors are not necessarily long-term. Lack of conviction in fundamentals is one of the reasons. But, more importantly, a culture of timing the market has taken roots on the Street.

Momentum game

In the last three years, the Indian benchmark appreciated four-fold as the growth discounting became the buzzword. However, momentum play had overshot the fundamentals.

The recent nervousness stemmed largely from overplay of the momentum game and to an extent, psychological over-dependence on the overseas liquidity flow.

After roughly a 20-per cent fall (from the peak) in the benchmark index, many overseas fund managers are again finding its current valuation difficult to resist.

India may not immediately turn overweight for those who have officially downgraded it underweight.

But, short-term players are likely to place bets again reversing the trend in the immediate term. Promoters of the "India story" are likely to find an easy excuse in the GDP growth numbers. It's just a matter of time. Or, perhaps, timing?

(This article was published in the Business Line print edition dated June 5, 2006)
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