Up with the market

With the Sensex inching towards the 12,000 mark, the stock market has once again proved its ability to surprise. In the past four months, the Sensex has first fallen by a sharp 30.6 per cent from its peak, and now recovered 36 per cent from the trough. The questions facing investors today are whether the steep fall was an over-reaction, and whether the present levels can be sustained.

Stock markets are a function of sentiment and corporate earnings. So far, corporate earnings and the growth of sales have been largely unaffected by the turmoil in many markets and growing uncertainties. High oil prices, the rise and fall of commodities and the upward bias in interest rates have not dented Corporate India's performance in the June 2006 quarter. Excluding oil companies, banks and financial companies, Indian firms put up a good show with net sales rising 25.93 per cent, while operating profit and net profit increased 29.48 per cent and 31.6 per cent, respectively""and all of them are handsome numbers. The expectations on corporate performance turned bullish in June and, as companies started reporting their results through July, the Sensex was lifted from its low of 8,799 points on June 14 to a healthy 10,800-point level in early August. The rest of the rally has been on account of improved sentiment. The expectations are that the US Federal Reserve will put a clamp on interest rate hikes, while oil prices have come off their highs and are now at the same levels as in March.

Domestically, sentiment remains cautiously optimistic. There is little doubt that corporate performance will lose some tempo this year, but foreign institutional investors have ploughed back Rs 6,856 crore since the beginning of July, which is Rs 20 crore more than what they pulled out in May and June. The increase in domestic interest rates has been absorbed, and the robust monsoon across most parts of the country will mean that India's consumer story will remain intact all the way through till the coming summer.

In bad times money usually shifts to large-cap stocks, and that has been true in recent months. While the BSE Sensex is 5.6 per cent below its peak on May 10, the Midcap and Smallcap indices are down 13.86 per cent and 24.4 per cent, respectively. In terms of sectoral performance, this rally has been kind to software companies, which are likely to do well even if there is a global slowdown, while bank stocks have largely mimicked the Sensex in this period. Metals have been among the worst performers. Only four Sensex companies""Infosys, Satyam, HDFC Bank and Bharti Airtel""have managed to cross their May 10 levels. Among the worst performers are Reliance Energy (down 26 per cent), Hindalco (down 25 per cent) and Tata Steel (down 23 per cent).

Analysts now predict a range-bound market. However, it would be prudent to keep in mind that this rally has one disconcerting fact. The average daily trading volumes in the cash segment for the BSE and NSE combined were Rs 12,884 crore between January and May, with a peak of Rs 14,700 crore in April, which has now declined to Rs 8,800 crore in August. While that is better than the Rs 8,250 crore of July, the decline in trading volume makes stock prices vulnerable in case investors take a negative view of the future.