Not a lucky number?

If there were any doubts about the influence of foreign institutional investors (FIIs) on Indian stock prices, these have to be buried. In April, FIIs brought in no more than Rs 537 crore, and the bull market crossed the 12,000-point mark. The next month, FIIs sold shares amounting to Rs 8,427 crore, and the Sensex tanked to 8,799 points. In June and July, their average purchases were quite low at Rs 1,400 crore, and the index recovered to 11,000 points. Since August, they have been at the centre of the current rally. In August, they brought in Rs 4,774 crore, and around Rs 6,000 crore during September and October.

For Indian investors, there is little to cheer about the 13,000 peak that the Sensex crossed on Monday, for this rally has been far more selective than the broad-based bull market seen earlier in the year. A few sectors and a few investors have been the real beneficiaries this time. The total market capitalisation of all stocks is still 4.7 per cent below the record market cap achieved on May 10, when the Sensex had closed at 12,612 points. Even in the 30-stock Sensex, only 16 stocks are higher than their May 10 highs. As the universe of stocks increases, the breadth of the rally gets progressively reduced. Of the 50 Nifty stocks, two-thirds trade below the May 10 high. According to the Business Standard Research Bureau, over three-fourths of all actively traded are still trading below their May 10 levels.

From their vantage point, FIIs have bought selectively into a few sectors and stocks, and driven up prices. The tech sector is on a strong wicket as outsourcing to India continues at a rapid pace. Bank stocks, which had fallen substantially in June, have recouped and reached new highs, as the global interest rate scenario is benign and valuations have turned attractive. The rapid pace of construction activity across the country has put some shine back on cement stocks too. Stock prices of the two dominant telecom companies""Bharti and Reliance Communications""are also rising as the number of new subscribers has beaten China's in the September quarter. A few other companies like Reliance Industries, BHEL and Maruti are also among the stocks that are higher than the May highs. The rest of the landscape though is still in the red.

Since June, mutual funds have been net sellers of stocks to the tune of Rs 743 crore. Retail investors have slowed down their mutual fund investments. In the first five months of 2006, they made fresh investments of nearly Rs 80,000 crore, which slowed down to Rs 3,400 crore between June and September. So the majority of traders and investors, who have not been invested in these few sectors and stocks, are not going to be cheering the rally. In other words, the Sensex reaching 13,000 points has not delivered the same punch that had been witnessed when it crossed earlier milestones. The fear of a correction looms large precisely because the rally is not broad-based and domestic participation is low. This can change only if other sectors and stocks catch up. Commodity prices have been falling, corporate performance has been good and the monetary policy seems benign enough. Could this change the view of the retail investor, who remains on the sidelines for fear that another correction will take his money away?