St pauses for breath, and consolidation

After hiking up Mount 15K, marketmen took a breather on Tuesday. It still left the Sensex on its swiftly-gained but hard-fought summit. The index closed at 15062.49, down 128.52 points or 0.85%.

Ten out of the thirteen sectoral indices of the Bombay Stock Exchange ended in the red as did 37 stocks that comprise the Nifty. The Sensex has risen nearly 2000 points in one week, and the street believes a period of consolidation is nigh.

The downside is limited compared to the rise we have seen suggested experts even as earnings and market abroad will be the primary drivers for an up move.

“The markets have risen for 5-6 sessions, so some consolidation or correction is natural. But this should not last more than a couple of days. We have started the earnings season on a good wicket, though there could be some disappointment as the laggards tend to declare their results in the end. An uptrend would be based on future expectation rather than latest quarter earnings,” said Deepak Jasani, head of retail research at HDFC Securities.

Earnings have been beating expectations, such has been seen recently in the case of heavyweights Infosys and TCS, and there are hopes that upward revisions could potentially find that markets valuations are more reasonable than they seem now.

“The rally has been driven by sentiment and liquidity. The Sensex is now aggressively valued at 20 times earnings. Unless there is an earnings upgrade, there is no reason for an upmove,” said D D Sharma, vice-president, research at Anand Rathi Securities.
Ridham Desai and Sheela Rathi of Morgan Stanley suggest that current estimates on earnings could be exceeded depending on government action.

“We are estimating earnings growth for the Sensex at 5% and 17.5% in F2010 and F2011, respectively, in our base case. If the government executes on reforms, we believe there will be more upside to growth, especially in F2011,” Desai and Rathi said in a note.

Institutional fund flows could also drive up markets, they said.  “FII ownership is coming off a 5-and-a-half-year low and is well off the peak. Mutual (fund) cash balances have reduced over the past three months, but FIIs still have substantial cash in their portfolios,” they said.

In July alone, foreign fund flows have been Rs 6,374 crore, while domestic institutions bought equities worth Rs 1,587.60 crore Market experts said liquidity is still flowing towards emerging markets and India, and risk appetite is adequate.

Capital flows have been largely from the west through funds managed out of Singapore and Hong Kong, said experts.

It has also come in from relatively new areas like Japan and the Middle East.
As for the corrections, an ambit capital technical report said short-term corrections could take the markets down to 4350.

Sharma, too, does not place the downside much lower —- at 4150.