Back with confidence

Exactly four months ago, the stock market was the last place you wanted to be invested in. After a two-year rally, in which the Sensex had gained an astonishing 200 per cent in value, touching its all-time high of 12,671 points on May 11, the stock market barometer corrected 30 per cent within a month. On June 14, the Sensex was down to 8,799 points as sentiment deteriorated dramatically. Since then, the markets have recovered and, last Friday, the Sensex touched yet another new high. But the market high this time is different from that in May. While the large-cap indices like the Sensex and the Nifty are on a roll, mid-caps and small-caps have been left behind. This can be explained by the fact that in weaker markets, money chases safety, and larger companies are safer than smaller companies. So the BSE 500, which has 500 constituent stocks against 30 stocks in the Sensex, is still 4 per cent away from its previous high, while the BSE Mid-cap and Small-cap indices are 13 and 18 per cent away from their May peaks. The preference now is for quality.

Another difference is that only a few stocks and sectors are driving the new market highs. Infosys, which came out with unexpectedly strong results last week, has led to a re-rating of the tech sector, as investors expect other tech companies also to do well. The mobile phone industry, which is adding more subscribers than any other country in the world every month, has increased interest in Bharti Airtel and Reliance Communication. But the best performer is the banking sector, which has appreciated by a handsome 55 per cent. In June, the banking sector was hit rather badly, the US raised interest rates in May and there was pressure on interest rates with a weak global liquidity situation. But as the US Federal Reserve has indicated that it is not likely to raise rates further, there has been some respite for banks. As the strength of the domestic economy has been confirmed through the GDP growth figures month after month, banks make a compelling story given the high credit demand and relatively benign interest rates. As a result, most banks are once again trading at their life-time highs.

Yet another difference is that the latest market surge has come through less participation from investors. The average daily combined turnover in the cash segment on the two leading stock exchanges was over Rs 33,000 crore in March and May, and Rs 42,000 crore in the intervening April. But since the market decline in May-June, the average daily turnover has fallen to the Rs 21,000-25,000 crore bracket, which is where it is even now. This indicates that the day trading community is still not back in the market in the same way that it was earlier this year. Retail investors too seem to be on the sidelines, and the data for September indicate that mutual funds have seen an outflow of Rs 23,542 crore during September. The positive development, though, is that foreign investors are back in the market""they were net sellers to the tune of Rs 8,247 crore in May, but have brought back Rs 14,693 crore since then.

What happens now? The economy is on a roll, and the handful of corporate results for the September quarter is encouraging. The bulls make a case that most other sectors and the smaller companies are yet to join the Diwali fireworks. They also say that retail investors will come in once again. If those expectations materialise, the Sensex could continue to rise even though valuations look stretched. But if even few key companies disappoint on the earnings front in the results announced over the next few days, it may be difficult for the markets to sustain at these levels, given that the trading volumes still do not indicate a runaway bull market.