Results, global cues to chart course

Market Watch

The stock market is riding high on imported capital and the momentum is so good that nobody wants to talk about the big correction. But, vulnerability is increasing as the market surges to higher levels.

In the 10 sessions this month, foreign institutional investors (FIIs) have invested Rs 5,415 crore in the secondary market and Rs 1,323 crore was pumped in on Friday alone. Market participants believe that as far as the global liquidity tap is open, the market will keep moving up.

However, increasing open interest position in derivatives, movement of hedge funds looking for currency arbitrage, adverse global cues and any unexpected move by the Reserve Bank of India in the next quarterly review can spoil the party, feel market players.

The Indian stocks are trading at a price-to-earnings ratio (PE) of 21.17 and the economy is growing at 8.5 to 9 per cent, the second fastest after China.

Some of the mature economies are growing at a much slower pace of 4 per cent and their PEs are comparatively much higher. The US market is trading at a PE of 18-19 per cent. Such calculations are making markets such as India more attractive for FIIs. Mega issues of ICICI Bank and DLF are over and foreign funds are still flowing in. This is a positive sign for the market.

Some of the foreign investors were waiting for the rupee to depreciate to put in their money. But, they started investing in India in desperation, when the currency did not depreciate, said a fund manager of a domestic brokerage, which handles the FII portfolio. According to him, some hedge funds, which are investing with a view to arbitrage on the rupee, will sell if the currency depreciates against the dollar. Being short-term players, they will anyway book profits, even if the rupee does not depreciate.

With the market moving strongly after consolidating for more than six months, the momentum will continue as far as the global cues are neutral or positive. But, the risk is rising in the market. Open interest in derivatives is rising quickly. Open interest till date is at an all-time high of Rs 83,000 crore. In July alone, open positions increased by 46 per cent. The market is getting heavier since short positions are also getting converted into long.

The week that passed saw realty stocks rising rapidly, supported by DLF. Metals stocks were also moving up smartly following a rally in global metal prices.

However, the market was not pleased with Infosys' results, which was hit by a stronger rupee. But for the currency appreciation, the software major showed good progress on all the other parameters, prompting some brokerages to maintain a buy recommendation. In the coming week, choppiness will continue in IT shares as other IT companies declare their results. Some of the old-economy companies will also declare their results, which will give a direction to the market.

Globally, Bank of Japan has not raised the interest rates, giving a positive sign to the market. The US Fed too had earlier not raised the rates.China's economy continues to grow in double digits and faster than anticipated.

On the other hand, crude oil prices are rising and the Indian basket of crude oil touched $73 a barrel, the highest for 2007. It is to be seen how long the market will ignore all these factors.