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The local equity markets this week may lead nowhere.
Though the petrol price hike is unlikely to dampen the sentiment, there are a lot many factors that would hold back the bulls and the investors.
The context is unambiguous. International investors have again been having doubts about the sustainability of global economic recovery. Inflation and the response to it in the emerging markets and Europe have increased the risk perception on alternative assets, including Indian equities.
The bull operators have been hurt badly in the past two weeks. They wanted to send a message on Friday that they are down, but not out.
However, the trend of short-covering and short-building continues in the absence of real investment activity. The indication one got at the end of the weekly trading was that at every rise on the cash market, there was creation of higher shorts in the derivatives market.
At the fundamental level, the high cost of capital and cost of inputs are likely to keep corporate profitability subdued.
For the bulls, the negative perception about earnings growth is the biggest challenge.
FII inflows have been the key driver in the local market. Their short-term withdrawal has cornered the bulls. Under the circumstances, bulls are learning the hard way that it is difficult to change the perception, which has turned distinctly negative. Other than traders, investors are discreet in entering the markets amid suggestions that it is the time.
A note from Espirito Santo to its institutional investors, mostly foreign, exemplifies present thoughts of serious players in the country. It said: “Slowing growth, stubbornly high inflation, deteriorating fiscal situation, a wild card in the oil price (cartels by OPEC), and consensus probably needing to increase its expectation for how far and how long the rate cycle has to run... not an ideal combination for the Indian equity market, unless you think this is all priced in.”
If India sees a flood of FII flows triggered by relative deterioration of developed markets prospects, it added, this would be the driver of the market.
However, very few think that this would happen shortly.
>jayanta_mallick@thehindu.co.in
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