Domestic institutions set to rule in '08

MARKET Watch

The market activity in 2007 was characterised by high risks and equally rich returns. The next year may be no different. The year gone by has disapproved many conventional theories.

The onset of a new year is traditionally a waiting period for Indian market players as FIIs decide their annual allocations only in early January. The Indian markets provided unforeseen returns of 20-25 per cent this year despite moderate initial allocations. But the sum alloted varied throughout the year depending upon the domestic fundamentals and global developments.

The second theory was that FIIs were big players and if they pressed the sell button, domestic institutions would be unable to provide any support to the markets. But despite profit-booking by FIIs on three occasions during the year, domestic institutions stepped in as big buyers, led by the insurance companies.

The second fortnight of February saw selling across the globe due to unwinding of thecarry trade. Those who had borrowed in yen and invested in other high-yielding assets, were forced to sell those assets in order to pay back the yen assets. The yen was strengthening due to the rise in interest rates in Japan. The US sub-prime crisis towards the end of July compelled FIIs to book profits across global markets, including India. Then, in October, Sebi's restrictions on participatory notes triggered a sell-off by FIIs. On all these occasions, domestic institutions were big buyers.

Domestic institutions are set to become more influential in 2008. They are sitting on a huge pile of cash, which is likely to be invested in the new year.

Moreover, the equity market is being opened up to pension funds and trusts. According to a veteran mutual fund CEO, "Government policies in the future may also help the Indian institutions to become stronger in the market place." He cites the restrictions on P-notes as a beginning in that direction.

The third theory that FII allocations in the beginning of the year will decide the inflows is not valid any longer. The worldwide market integration leaves no one insulated from global happenings and this in turn could affect the inflows. In any case, allocations are now being reviewed on a monthly and quarterly basis.

The size of the Indian market is increasing faster than ever. While the Sensex went up by 47 per cent in 2007, the market cap increased by 93.78 per cent. The Indian market is now valued at $1.81 trillion and a mere 10 per cent rise will take it to $ 2 trillion.

xOur markets look overvalued in terms of price earning ratio (P/E) compared with most markets around the world. But as long as companies perform, investors would be willing to to pay a higher price. The corporate earnings have been growing since 2003 and are likely to continue their upward trend as long as the Indian growth story sustains.