This week, if the market goes in for a correction in the benchmark indices, downside, however, seems limited.

Jayanta Mallick

THE equities market is at an interesting junction. A strong overseas funds flow, which had been driving the benchmark indices, was not disrupted by the London blast. The local market was among the least affected last week. The recovery trail in other markets was also noticeable.

But a strong hurricane that is predicted to hit the US coast on Sunday may make a difference in outlook for equities world over.

Dennis the menace: The category 4 hurricane Dennis is apprehended to be nastier than last year's hurricane Ivan, which was of a category 3 kind. Ivan had affected the crude oil production at the Gulf of Mexico by around 7 per cent and created jitters in the crude oil markets for three weeks.

Given that the oil price has greater leverage than terrorism on the global capital markets, the quantum of devastation by Dennis may broadly determine investment sentiment this week.

As the insulation of Indian market from the global trends is thin, a serious disaster may hit the Indian shores too.

However, the current flow from the different overseas fund baskets and investor groups to Dalal Street may not necessarily be identical. The $60 crude did not deter the FIIs to invest in local stocks, as it is widely believed that the Indian economy and the corporates have been able to cope with higher oil price regime in the past few quarters. The domestic politics, however, will not allow a runway price increase in petroleum products.

On the other hand, the economy may not be able to take on sustained assault on the crude front and raise the subsidy burden.

The signals from the FII circles suggest that except for short-term blips, Indian equities remain high on the priorities of the overseas funds. This may be the overriding factor in determining the pricing of the local stocks.

After the recent Japanese entry into the local equities, Dalal Street is now agog with expectations of South Korean funds to pump in fresh money. It is reliably learnt that a few Korean funds have planned to launch Indian equity dedicated funds shortly.

Moreover, there is a phenomenal increase in liquidity in the global market system of late. The US corporate savings this calendar year is hovering around $550 billion. Much of it is being directed towards the emerging markets. This has both direct impact and multiplier effect on the valuations of local blue chips.

It is difficult to take a definite call on the global flow of money, but a back-of-the-envelope estimate indicates that to sustain the Sensex at the current level, a net positive FII investment flow of around Rs 150 crore on an average daily basis is a must. The last week's net average flow was much higher, highest being on Thursday at Rs 405.90 crore.

This week, if the market goes in for a correction in the benchmark indices, downside, however, seems limited considering the trend and quantum in liquidity flow.

There is a consensus among the market observers that even if the key indices take a break and consolidate, the mid-cap and small-cap stocks are likely to chug ahead.

Among the sectors that may continue to attract attention are bank, media and pharmaceuticals. However, stock-specific developments being the main driver in the mid- and small-cap space in the current run, individual counters may sparkle on secular movement rather than on a sectoral euphoria.

Future shock: The domestic market seems to have developed some immunity to external and internal shocks, thanks to the current attention on the Indian equities overseas. But, if for some reasons the indices get battered consecutively for a few sessions, the buoyancy and confidence would give in.

These short-term halts apart, the Indian gravy train appears poised for a long haul.

(This article was published in the Business Line print edition dated July 11, 2005)
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