Third-quarter results to steer trend

MARKET WATCH

The sentiment on the Street has definitely improved. The week saw the Sensex (up 84 points) end in positive territory, after closing above the 14,000 mark for the first time on Wednesday. It faces resistance at 14,060 and the Nifty at 4050. This means the markets have to push above these levels to see further upside.

The market consensus is that the near-term outlook will depend on Q3 results. Infosys' numbers, to be announced next week, are expected to set the trend.

While on the domestic front the fact that net open interest positions in derivatives are increasing is being seen as a good sign, the weakening of global crude oil prices is a positive signal for the direction of the global markets.

The reason behind the downtrend in commodities, including metals, is a possible US slowdown. The domestic market will discount this. The second round hike in call money rates too is coming into effect, and it is to be seen if it has a further impact on interest rates.

"The hardening of interest rates will affect the bottom lines of companies, especially those which have high debt," said an analyst.

Given that India is one of the costliest markets in the world in terms of P/E (price-to-earnings) ratio, momentum players will set the trend in the medium term.

Traditionally, in January, foreign institutional investors (FIIs) decide their annual allocations, and the domestic market is waiting to see the quality of these allocations.

"The equations of annual allocations are changing as the ratio of such investments to the investments of local institutional investors and hedge funds is changing," said Naresh Kothari, head - institutional equities, Edelweiss Securities Pvt Ltd.

A few years ago, FIIs and local institutions "� mainly mutual funds "� were investing in the ratio of 80:20. Today, it has changed to 60:40. And of the foreign investments too, half is from hedge funds, which are actually momentum players and are not dependent on annual allocations. In 2006, Sebi registered 217 new FIIs.

Many of these, which have already invested in the Indian market, are not dependent on new-year allocations. Effectively, the investors who invest based on allocation guidelines account for 30 per cent.

Many FIIs are linking their investments to Morgan Stanley Capital Index. There are a few other benchmarks as well. But the vexing issue is: the financial markets have become very volatile in recent years, and in such a scenario, can any investor take a one-year call at a time.

Kothari said though Edelweiss decides allocations in the beginning of the year, it reviews them once in a quarter and also in case the occurrence of a major event or two requires a region-specific review.

Even the definition of hot money is changing, as local investors too are turning hot in many cases. Last month, banks withdrew huge investments from liquid funds to meet their immediate cash requirements.

Retail investors and even high networth investors are also turning hot. They are giving the impression of being less patient than foreign investors.

To sum up, the third-quarter results will drive the market in the short term, while momentum investors will rule in the medium term.