Don't expect a Sensex encore

2007 THE YEAR THAT WILL BE

Can the stock markets repeat the spectacular bull run for the third year running in 2007, or will the law of averages catch up in the new year?

After two years of over 40 per cent rise in the benchmark Sensex, the experts are unanimous in their response: don't expect bumper returns in 2007.

"In the 150 years of stock markets, the average return given by the markets (globally) is 6 per cent per year," cautions Ian Morley, chief executive officer of Dawnay, Day Brokers, which is planning to launch two equity funds in India next year.

"There is rational expectation and irrational exuberance. We surely have gone past rational expectations and must be nearer to the irrational exuberance now," he adds.

Some key events would set the pace for the markets in the new year.

These are the earnings numbers in the next couple of quarters, the state of the US economy, the interest rate scenario, the Union Budget and the monsoon.

A negative outcome in any two of these events may have a significant bearish impact on the markets. "A key driver of the markets during the last couple of years has been the robust inflows of foreign funds into the domestic markets. A slowdown in the US economy or emergence of other attractive destinations would have negative implications for our markets," said a dealer in a domestic brokerage house, which has a major institutional business.

Foreign funds pumped in close to $ 9 billion in 2006, after they bought a record $10.7 billion in 2005. "You cannot expect foreign investors to continue pumping money into our markets year after year. At some point, they will look to book profits," he pointed out. "And our markets are vulnerable to foreign inflows and outflows."

A reminder of this came in the form of the erosion of over 30 per cent of the gains in key indices in a matter of days after foreign funds pulled out over $1 billion during May-June.

Says Ajit Roongta, fund manager with IDBI Capital Markets: "We are bearish on the markets till the 12,500 level (on the Sensex) is reached. We will take a call at that point." He points out that the market has not witnessed a major correction for the last 5,000 points i.e. from 9000 (after the correction) till now.

However, Roongta still sees good growth prospects in sugar, textile and oil refinery stocks. In contrast, he feels the technology, bank and even infrastructure stocks are in an over-bought position. "I see a technical correction in stocks in these sectors."

Motilal Oswal, chairman of Motilal Oswal Financial Services, says he expects the stock markets to consolidate at current levels.

"Index-wise, I think the market will get consolidated at current levels. But, there will be lot of action in specific sectors and companies. I think we should have a bottom-up approach rather than a top-down approach. We are positive in the banking, cements, auto and telecom sectors."

That suggests mid-cap and small cap stocks may become fancied again, especially considering that the indices for these categories have risen less, at 25 per cent.

The primary market, which has seen some big public issues in 2006 (Reliance Petroleum, Tech Mahindra, Cairn Energy, Sun TV, Development Credit Bank, GMR Infrastructure), is expected to attract more companies in 2007.

Some of the most anticipated IPOs expected to hit in early 2007 include DLF Universal, Power Finance Corp, Mind Tree Consulting, ICRA, Indian Bank, MCX and Idea Cellular. "The IPO market will definitely be hot and that can provide a boost to the secondary market," says Motilal Oswal.

(The article in this series, on manpower trends in 2007, scheduled to appear today, will now appear on Friday)