Analysts say corrections essential for restoring market health

The corrections that the stock market is currently witnessing may be unsettling some investors. But a section of the market feels such corrections and roadblocks, if any, are good for the overall health of the market, especially since the stocks have crossed the undervaluation zone.

The markets are extremely volatile in 2004. So far this year, the Bombay Stock Exhcange's Sensex has plummeted 424 points from 5,838.96 on December 31, 2003 to 5,414.94 yesterday.

Some players indicate that after the massive rally in 2003, corrections in Sensex were expected in any case.

"If we didn't see corrections on the way up, we would have been on the roof and keeling over," says a dealer froma a local brokerage. This Sensex surged by 73 per cent last year.

Much was expected in 2004, especially from the foreign institutional investors (FIIs), who bought Indian shares worth $6.4 billion in 2003.

FII inflows were expected to be higher in 2004, or at least maintained at last year's levels, because of globally loose monetary policy and a string of elections around the world.

Indeed, FII inflows in the first three months of this year have been almost 25 per cent of total inflows last year. Yet the markets have not responded to this stimulus.

Market sources said the problem is with the general perception of liquidity, which, in a self-fulfilling prophecy, is keeping investors out of the markets.

In fact, more than Rs 15,000 crore has been raised from the primary markets in the last one month. Some analysts had expected this to drain liquidity in the secondary markets, pulling the Sensex down. But this did not happen, at least not as much as expected.

Nandan Chakraborty, research head at Enam Securities, says in his latest India Strategy Report: "The near term is fogged by initial public offerings (IPOs), elections, potential currency disruptions, and if all goes well, more IPOs. And valuations, while being reasonable with reference to immediate growth and historical price-earnings bands, are not salivating any longer."

He, however, adds that if there were no fog, our visibility (and market levels) would have already encompassed India's longer term advantages in demographics, economic growth, domestic potential, export competitiveness, and the huge infrastructure spend planned up to 2009 in a host of sectors by the government.

According to analysts, the immediate-term triggers include: a continuing upswing in commodities prices; share purchases driven by cheap finance; policy stability even after the elections; and a stronger currency. They added that a bad monsoon and an over supply of shares in the secondary market may act as roadblocks.