Now domestic money

With the Sensex once again hitting a new high point on Wednesday, falling only marginally short of the 12,000-point mark, bulls are back in business after a brief fright last week. And this time, it is not the same foreign money that is powering the upsurge; in fact, foreign institutional investors (FIIs) have been net sellers of about Rs 1,300 crore so far this month. And even that figure should be seen in perspective, since FIIs have already invested Rs 16,600 crore in less than four months of 2006. Still, FII sales did impact the market as it fell by 425 points over two days last week. But mutual funds, which are sitting on a cash pile of over Rs 20,000 crore, provided support and invested Rs 800 crore and more in just three days, even as FIIs were selling. Some support also came from other domestic investors who wanted to buy into the fall. So, for a change, the rally has been driven by domestic investors, many of whom may have felt that they were losing out and have decided to join the party.

This being the season for quarterly results, it is also important that the first handful of results that have been announced have mostly pleased the markets. Infosys' results last Friday were below market expectations, but its guidance took the market by surprise, with the stock gaining almost 9 per cent. When Infosys said it expected its revenues to grow at 30 per cent and net profit by 26-28 per cent in 2006-07, it caused all-round bullishness for the whole tech sector. Other results from large companies in sectors like cement (ACC and Gujarat Ambuja) and banking (HDFC Bank and UTI Bank) have also told an optimistic story, and investors who may have had a question in their minds, now seem re-assured that corporate earnings are still doing well.

Volume growth has been strong for most of the companies that have declared their results so far, but there is pressure discernible on margins. In a Business Standard study of estimates for the fourth quarter, revenues for Sensex stocks was expected to grow by 21.7 per cent, though operating profits were likely to post a mildly muted 17.35 per cent growth. Obviously, with rising costs of raw materials (employees for software companies, or money and for banks), nobody had expected margins to improve. But since stock prices are about future earnings, investors are usually optimistic about the general run of companies, so the next year may get even better for Pakistan. And as long as the growth in earnings per share keeps rising, investors will not be complaining.

Whether the Sensex goes above 12,000 points will be decided on corporate profits in the next few days. On the valuation front, the Sensex remains expensive at a trailing 12-month earning of 21.54. There have been enough voices of caution in the past three-four months, but the market has only gone up. With the Sensex reaching for 12,000 points, there will be more pessimistic views, especially from the foreign brokerage firms.

So far, FII sales have been mostly blips on the trading screen, which could be the temperance of a few institutions, leading to some profit-taking. On the other hand, the new wielders of financial power""the domestic funds""provided support to the market, when the mood on the street was low. Not that mutual funds can keep buying, if there is wholesale selling by FIIs. At the beginning of the year, some market pundits had predicted that the retail investor could be the surprise element this year. If that happens, this market could see more gains.