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BW Businessworld

Sensex See-Saw

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Last week, the mood in the market remained subdued on global and local factors. For the past three weeks the turmoil in the US and European economies have kept markets weak. Domestically too, various scams, delays in decision making, high inflation and interest rates have kept markets edgy and thus turned sentiments negative among investors who have been sitting on the sidelines. These factors have also kept the FII fund flows muted, which in turn impacted markets. Last week (in three trading sessions), FIIs sold equities worth more than half a billion dollars.

The week started on a weak note with players building short position in the future & option (F&O) market in anticipation of the market melting on global fear, especially the Euro-zone debt crisis. On Tuesday, 4 October 2011, the selling in the market pulled down the Bombay Stock Exchange (BSE) Sensitive Index (Sensex) to its 20-month low of 15,745.43. The market lost ground after rating agency Moody's downgraded State Bank of India of concerns over its capital situation and deteriorating asset quality.

In fact, since the beginning on the new October 2011 future & option (F&O) series that started last Friday on 30 September 2011 till Wednesday, 5 October 2011, the market lost each day losing 5.4 per cent or 905 points in four sessions. But on Friday, the Indian market snapped its four days' losing streak playing a catch-up to its Asian counter to end 3 per cent or 440 points higher with Sensex ending above 16,000. The sharp upturn in the market on Friday was due to the Bank of England announcement indicating additional asset re-purchase facility of £75 billion and the positive comments from European Central Bank on additional support for European banks. Though the rise didn't help much, for the week ended 7 October 2011, the Sensex ended in negative territory with a fall of 221 points at 16,232.54. Overall, the market lost one per cent last week. On Thursday, markets were closed following holiday on account of Dassera.

The market managed to recover on Friday, but can it maintain its upward movement?

There is no element of surprises left in the market and it can handle global and domestic shocks, but global events don't favour any upwards move. Despite the better-than-expected reports on the US job market, the US market ended weak on Friday following the ongoing concerns about European debt problems in Greece, Portugal, Ireland, Italy and Spain. This was due to rating agency-Fitch downgrading credit ratings of Italy and Spain. Adding to the woes was Moody's downgrading 12 UK financial institutions.

Dipen Shah, head of fundamental research at Kotak Securities says: "It is difficult to ascertain whether the problems of Euro zone will be solved in the near term or not. This uncertainty makes it difficult to judge the longevity of the recent uptrend in markets." However, he feels if there aren't any major shocks in developed economies, markets may not fall significantly.

In such a scenario where do we see markets advancing from here?

"It is very difficult to give a call on the market movements in the short-term. However, IIP numbers and the quarterly results, which will start flowing in, will influence the markets," says Shah.

On Monday, 10 October 2011, there could be some action among telecom stocks with the government unveiling the draft guidelines for the new telecom policy. The guidelines are expected to include rules on pricing of second-generation radio airwaves and mergers and acquisitions in the sector. Bharti Airtel and Reliance Communication account for 3.25 per cent weightage of the Nifty and any positive news could act as a trigger for the market.

The industrial production (IIP) for August that will be announced on Wednesday could also help the market move upwards. "If it beats market expectation of 5.5 per cent, we could see some action in the market," says Shah. According to market estimates, IIP numbers are expected to record a growth between 5 and 5.5 per cent in August as against 3.3 per cent growth in July. While the inflation numbers this week (on Friday) will be crucial as it will give an indication on the Reserve Bank of India's (RBI) stance on interest rates. On 25 October 2011, RBI will announce its half yearly monetary policy.

The week will also mark the onset of the September ended corporate results. On Wednesday, software bellwether Infosys will unveil its second quarter corporate performance.

Though the street isn't expecting much from the results, any positives could boost the market and visa versa. "Overall earnings growth will remain muted because of lower revenue growth in a few sectors and due to the high raw material prices and interest rates," says Shah. "We need to take a stock-specific approach and companies which outperform the reduced expectations, may see a rise in the stock price."

So what should investors do in the current scenario? "Stay on sidelines, but start investing for the next two years," says Gurunath Mudlapur, managing director of Atherstone Capital. "Every dip is an opportunity to accumulate the stock. Today you can start investing 5-10 per cent of your cash in companies related to the Indian consumption story." Agrees Shah who himself is willing to bet 65-70 per cent of his cash in equities at current levels. "Valuations are not unreasonable at current levels and for the next 1-2 years equity is the only asset that can give a return of 15 per cent per annum," says Shah.

Overall it seems to be an action pack week dominated by domestic events.