Solid corporate performance in the Q3 ended March 31, and strong FII inflows have been the key drivers that pulled the markets up.
That will provide crucial legs to the market; 2006 May-hem is just a distant fear for now
MUMBAI: Solid corporate performance in the quarter ended March 31, and strong foreign institutional investor inflows have been the key drivers that pulled the markets up from the lows of two months ago.
Now, with the results season petering out, there is a near-consensus that liquidity will be the primary driver in the short term. Therefore, what foreign institutional investors (FIIs) do will decide the direction over the next few sessions.
FIIs pumped in $63 million a day — or Rs 5,500 crore in April 2007. Between last Monday and Thursday, FII inflows were negative by Rs 248.40 crore, which may be viewed as a mild negative.
“The reason behind the huge inflows in April was that US markets were hitting new highs. When money flows into US markets it also tends to flow into emerging markets,” said Lalit Thakkar of Angel Broking.
“So we are very positive on the local markets.” The surprising buoyancy in the US is naturally drawing the sceptics, who are worried about valuations.
But Citigroup’s New York-based analysts Tobias M Levkovich, Lorraine M Schmitt and Daniel C Kaskawits said the fears are unwarranted.
“A bullish disposition is still appropriate in the US, despite the recent market strength. Earnings expectations, liquidity and valuation remain supportive,” they said in a note to clients on Saturday.
According to them, a number of valuation metrics continue to forcefully argue for more upside potential in US stocks.
Also, crude prices have trended lower by about $5 last week.
Another key event that could affect FII inflows is the US Federal Reserve’s Federal Open Market Committee meeting on Thursday and the European Central Bank’s stance.
In his report on emerging markets on Friday, David Lubin of Citigroup said both the Fed and the European Central Bank (ECB) are likely to remain on hold next week, but the ECB’s language should signal an impending June hike.
The local consensus view is that Asian story continues to remain strong as there are no fundamental negatives.
Naresh Kothari, head of research at Edelweiss Capital, said there could be some liquidity concerns.
“But the scare-mongering has receded significantly. I don’t see any significant negative trigger vis-a-vis India internationally.”
Are we in for a May 2006 redux?
The refrain is that nobody is expecting it this week. And even if FIIs decide to press ‘sell’, it would just be a short-term thing.
What’s in favour, they said, is corporate earnings growth at 15-20% for the next year.
Rajagopal, head of equities at DBS Chola Asset Management, said if liquidity remains strong, then market will go
further ahead.
“In its absence we can see consolidation in a broad range of 3850-4200 for the Nifty. This is where lot of put-call action has been taking place of late.”
The tipping point would be when the rupee breaches the 40-mark against the dollar. “If Reserve Bank of India intervenes, it can lead to another rate hike, but the market may already be factoring in a cash reserve ratio hike,” Rajagopal said.
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