Market will continue to be nervous

The Indian stocks are perched at uncomfortable levels and if the global cues continue to remain weak, there could be further selling in the domestic markets. The weak closing on Muharat day suggests that the ongoing correction might continue, amid volatility. Friday’s close far below the opening levels, accompanied with low volumes, was also an indication that bears were making their presence felt. The market has already corrected by 7 per cent from its all-time high. But since the near-term trend looks weak, a pull-back may attract further profit booking.

The stock market has given 50 per cent returns in Samvat 2063, as has been the trend in the last three years. But the market is lately showing signs of some nervousness as foreign investors have got into a sell mode since the Sebi proposed to regulate participatory notes (P-notes). Since 17th October, the FIIs have been net sellers in the cash market to the tune of 2.3 billion dollars. The domestic institutions have supported the market during this period, buying shares worth $1.35 billion. Foreign investors have reasons to sell as valuations appear to be rich. Asian markets in general have received strong inflows as they have been perceived as safe investment heavens. The resultant rise has made historical valuation irrelevant.

A Citi group report has said that Asia is now the most expensive region. It is trading at a P/E premium of 29 per cent to the developed world and 14 per cent against the general emerging markets. On a PV (price to book value) basis though, Asia is at a moderate discount against the general emerging markets despite the recent selling by foreign funds in the Indian market.

The Indian and Korean specific country funds attracted inflows worth $1.6 billion in the last four weeks, almost double the inflows into the Hong Kong and China funds. This would translate into buying at lower levels. Despite pressing sales, the FIIs were not eager to take money out due to the rupee appreciation, according to banking circles. “Hedge funds are selling as they need to have cash to pay dividend to their investors,” said an FII broker. The impact of sub-prime crisis is showing in the September quarter results of US-based hedge funds, thereby forcing them to book profits.

The crude oil prices, which are at a sniffing distance of the $100 mark, are expected to affect corporate bottom-lines as the prices of many industrial raw materials and intermediates have started moving up. Imports have already become costlier and domestic companies have started raising the prices of their products. Petrochemicals, polymers, chemicals and solvents and furnace oil prices are moving up. The government is under pressure to revise prices of petrol and diesel, which will make transport costlier. Globally, the Asian and US markets have been correcting for some time due to the high crude oil prices and re-emergence of the sub-prime crisis. Once stability returns, foreign money waiting in the wings is bound to enter the Indian markets. Hence, the global factors hold the key to a recovery back home.