Sensex Song And Dance

Brokers attribute renewed foreign institutional investor (FIIs) interest in the market to be the driving force. FII's aggregate investment spurted to $ 365.5 million in the month of June 1997, as against $ 198 million in the previous month.

This rally has been fuelled by a bunch of events. Brokers say it is difficult to pinpoint the trigger point, but the 1:1 bonus from Reliance, and UTI maintaining a dividend of 20 per cent appear to have done the trick.

Indeed, brokers say, reports of the UTI expecting to collect almost Rs 2,000 crore in its special July offer for US-64 has fanned the rally. If the Trust indeed does collect more money in one month than it did over the last one year under its US-64 scheme, it is good news for the markets. It will relieve the UTI from its cash bind and therefore, the institution may not be selling aggressively in the rest of the year.

 

Other financial institutions, too, are flush with funds with no investment opportunities. It is therefore most unlikely that they will be tempted to sell in the markets.

ITC has kept speculative interests alive due to low floating stock. Above this there was rampant speculation in the market with most of the blue chips being in no delivery period.

However, the current rally was mainly restricted to the index weighted scrips like Hindustan Lever, ITC, Reliance, Glaxo etc., The same is due to intense activity of some of the US- based index funds which concentrate predominantly on these index scrips.

A broker at a leading Indian brokerage house said the delivery that he gives of every MNC stock is being taken by the FIIs.

However, comparing the price movement of the index based stocks against the Sensex, only the Fera stocks have outperformed the Sensex. All the Fera stocks in the Sensex have gained over twenty per cent, with Glaxo being the largest gainer with 42.15 per cent.

Reliance is the only Indian stock with higher weightage which has out performed the market. It has gained 22.70 per cent in this period. This was mainly due to the announcement of bonus issue.

Also the tight liquidity and the general slow down in the economy, that resulted in the lacklustre corporate performance in the year 1996-97, has made available some of blue chips at lower valuations. These stocks, available at historically lower discounts, offered better scope for the FII's to park their funds as compared to other emerging markets.

According to few analysts, most Indian stocks are still not fully valued as their price earnings are still lower as compared to stocks in other emerging markets. Most of the Indian blue chip stocks are still traded at PE multiples of less than 15, almost half the multiples in other emerging economies. This leaves a lot of scope for appreciation in the Indian stock.

Brokers say despite the uncertainty, there is tremendous earning potential in Indian companies. Corporate results are expected to be better in the second half of the current financial year 1997-98 as well as 1998-99.

An analyst at a leading foreign brokerage house says all negative factors have been discounted by the market.

However, even after this rally, the movement in mid and low market cap stocks seems to be quite narrow. Only a handful of stocks in the B group have outperformed the market. Even among these stocks most of them are Fera stocks like ICI India, Grindwell Norton, Foseco, Vesuvius etc. Only some Indian stocks like Infosys, Hitech Drilling, HDFC bank, Marico etc have performed better than the market.

However, the low market cap companies have not found any buying interest, the reason being that they have lost the confidence of the small investor. Till such time as the retail investor comes back into the markets, these stocks will languish.

Also other visible trend is the major movements in some particular industries especially the pharmaceutical industry. Pharma stocks--mainly the MNCs--Glaxo, Burroughs Welcome, Dr. Reddy's, Pfizer, Parke Davis and German Remedies have registered gains of over 25 per cent in the last one month. This can be attributed to the ongoing shake out in the industry, in which only the bigger local players and MNCs will survive. According to a technical analyst, technically the index took support at level of 3700 and breached the resistance at 4020 level during the current rally. Now it is headed against strong resistance at 4630 level.

But few marketmen say the time is ripe now for the Indian financial institutions to start unloading stock. This may lead to minor correction in the market. More importantly, FIs could stand to make major gains.