The Sensex has gained nine per cent in the last two weeks and, on Friday, it pierced the 4,000 barrier once again. Will this rise in the stock markets sustain or will it all fizzle out once again as it did when it had last topped 4,000 in the wake of the dream budget? The Sensex has mainly been driven by a few heavily weighted stocks like Hindustan Lever, Reliance and ITC. Other stocks which have a lower weightage have underperformed the market. Of the 30 Sensex stocks, only seven have overperformed the market, while as many as 20 have underperformed the market, with the residual being in line. And since there are very clear reasons for the rise in the three aforementioned stocks "" bonus rumours in Reliance, Hindustan Levers compromise with the Reserve Bank on the preference issue for the Ponds issue, and renewed buying by operators and FIIs in ITC "" is the surge a chimera?
The answer may lie within the less glamorous but broader market indices. In the same period, the Nifty has also risen by over nine per cent and the BSE-100 (national) index by almost eight per cent, while the BSE-200 index has risen seven per cent. This does illustrate that the rise has been spread across the market and not just limited to a few select scrips in the specified group.
If indeed, this rally across the board continues, it may indicate that the market has already fully discounted the ongoing slowdown in industrial production which began last year and the lower profits being declared by many corporates for the last fiscal year. It is now looking ahead to better results from companies in this fiscal and this has resulted in investors buying pharmaceuticals, software, banks and refinery stocks. Indeed, the gain in core sector stocks, like cement and steel, suggests that the market is looking ahead to a revival of industrial growth based on investment demand.
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As far as buyers and sellers go, some things have changed in the recent past and some have not. Foreign investors remain the prime buyers but much else has changed. The supply of stock in the market is no longer abundant, making prices volatile. On the other hand, selling pressure has eased not only from financial institutions but also from corporates which have been sellers in the market during the past one year. Foreign investors have also started paying closer attention to India. FIIs like Morgan Stanley have publicly advocated a move from Latin America to markets like India. Others have stated a desire to exit other south east Asian markets in favour of India.
But though the rally is more broad-based than first thought, there is reason to expect other market realities to pull the indices down. Investors have been losing money consistently for the last two years and it is only natural they will look to book profits at the earliest opportunity. Even if some investors hold back from selling, expecting the rise to continue, they will book profits in the short-term. Stocks in sectors like oil and software, which have emerged as the investors favourites over the last six months, saw prices plunge in the last week on sustained profit taking when most other stocks were rising.