On a new high

Changed expectations with regard to interest rates as well as continued good news at specific counters would explain the current rally on the stock market, and a new high for the Sensex after nearly five months. With inflation rates falling in many countries (including the US and India), interest rates are generally seen as having peaked""and that will have given confidence to bulls after the setbacks of March.

A restraining factor even now would be that many stocks are seen as being fully priced, and the market as a whole is not cheap when the price-earnings ratio for Sensex stocks remains above 20. Indeed, judging from the behaviour of individual stocks, it is clear that price increases now are being driven by specific performance numbers announced by companies""hence the surge in recent days by scrips like Maruti and ICICI Bank. The concern flowing from that would relate to the breadth of the rally""and here the picture is a very mixed one. The post-March rally, when stocks had fallen in the wake of an uninspiring Budget, has taken in indices like the Nifty Junior, BSE Midcap and CNX Midcap, all of which have hit new highs. The only index which was below its May 2006 high""the BSE Smallcap""crossed the level on Tuesday. Still, it is worth bearing in mind that only 13 of the 30 Sensex stocks are now ruling at higher than their prices five months ago. Dig deeper, and 64 per cent of the 2,630 stocks that are actively trading on the BSE, are available below their levels of early February.

So, if analysts were to look for new explanations, one would be the role that has been played in this rally by smart operators and high net worth individuals. Global fund flows, it should be noted, have been slowing down when it comes to secondary markets. Fresh investment into stock markets has been mostly negative through 2007, except for April; in June, foreign institutional investors sold Rs 1,361 crore of stocks on the bourses, according to data provided by the two leading stock exchanges. Sebi records a net FII inflow of Rs 5,837 crore in June, but that includes primary market investments (there were two big issues by DLF and ICICI Bank) as well as the conversion of foreign currency convertible bonds (FCCBs) and global depository receipts (GDRs). And when it comes to mutual funds, which are the barometer of retail sentiment, the inflow is now barely a trickle""Rs 2,085 crore in April and May 2007 this year, compared to Rs 11,263 crore a year ago.

The unexpected movement of the rupee has added a new element to the calculus; instead of a one-way movement over extended periods of time, the rupee has now started moving in both directions against the dollar. While this has added some uncertainty, it has also raised the prospect of additional gains to foreign investors, in case the rupee gains in strength. But then, a strong rupee also hits the earnings of export-oriented sectors like software services, and the tech companies are generally expected to suffer a margin squeeze. At the end of the day, though, bear in mind that global markets are on a high once again. So, in crucial ways, this is still a global story.