Market weakness

The recent performance of the stock market has exploded two myths. One of them is the argument that primary issues bring in new investors and help to expand the market.

While this has undoubtedly been true so far as foreign institutional investors are concerned "" the ONGC issue was heavily subscribed by FIIs "" it hasn't held true for the retail investor.

In fact, the poor retail response to the ONGC issue appears to be an indication that the small investor has been financially stretched by the spate of issues.

Lack of liquidity has also been cited as the main reason for the weakness in the market, and that's borne out by the very low volumes.

The second myth that has gone bust is the theory that the success of the government's disinvestment programme would provide a boost to the market.

Relieved that the bunching of new issues was over, sentiment was expected to improve, and the market was supposed to start moving up again.

However, the elementary laws of supply and demand have prevailed, and the deluge of paper in the primary market has resulted in falling prices.

As a matter of fact, even FII flows seem to have cooled off to some extent, again very plausible given that they have subscribed en masse to the new issues, and this exposure to the Indian market would presumably reduce their need to buy equities in the secondary market.

And while it is true that domestic mutual funds have once again turned net buyers, the amounts they have brought is nothing to write home about. Putting it simply, there is an all round lack of buying interest.

There are several reasons for the caution. One of them could be a dislike of taking fresh exposure to equities in the few days left in this financial year.

Another reason that has been advanced is that investors are waiting for the next round of quarterly results. But a more fundamental reason for the weakness is that there do not seem to be any significant triggers for the market in the near future.

The quarterly results are expected to be good, but there are worries about price rises in commodities and the effect higher raw material prices will have on corporate bottomlines.

And while everybody talks about a stable government at the Centre being the next trigger for stocks, given the widespread expectations in the markets about the return of the NDA, it is unlikely that its re-election would lead to market euphoria.

Furthermore, by the time a government would take office it would be time for the next big worry "" the state of the monsoons. Also, one shouldn't lose sight of the fact that there are several large primary issues in the pipeline.

Needless to add, the pessimism in the Indian market is linked to the concerns weighing over equity markets the world over.

Concern over a resurgence of terrorism, together with nagging doubts about the strength of the US recovery, have led to the MSCI World Index falling by 1.2 per cent in the last month, while the emerging market index fell 1.5 per cent.

However, the consensus is that the Indian market continues to provide good value for the investor, and with US interest rate rises on hold, there's no reason why inflows should not continue, once the market has recovered from the effects of the government's divestment binge.