Bumpy road ahead for D Street as institutions plan to exit on rally

Najaf Ishrati

June 05, 2006
ET Economy, Mumbai

ALTHOUGH Friday’s rally, helped by some heavy covering of short positions after consistent FII outflows, may liven up hopes for investors, the outlook remains extremely cautious in the short term.
Analysts say the liquidity issue cannot be swept under the carpet. From a stage when the system was flush with liquidity from domestic and foreign funds, the correction has caused a flight of capital to safer grounds. The expectations of a possible 50bps rise in interest rate in the US have fuelled the outflow.
Many institutions have adjusted their strategy to a ‘sell-on-rally’ environment, expecting markets to weaken further. The main factors cited for the shift in outlook were increased global risk aversion and rising interest rates in India & abroad.
Jyotivardhan Jaipuria and other strategists at DSP Merrill Lynch chorus: “Given the large FII flows over the last three years, India may be vulnerable to a fall in global risk appetite.” Many of the top foreign funds are expecting the sensex levels of 9000 or below in the near future. DSP ML has a figure of 9000; UK-based Rathbones Investment Management expects markets to trade between the 9000 and 7700 levels, while Nomura sees a fair value at 7000.
In a recent India research report, Hong Kong-based Nomura International stated: “While the macro problems of running both a deteriorating current account deficit and a fiscal deficit have yet to be adequately addressed, private sector credit has become increasingly dependent on fund flows. With a negative basic balance of payments, the credit system appears much more susceptible to an external shock. We feel that investors are being betrayed by high earnings growth projections and macro risks are being ignored. We believe Indian equities have further ground to correct compared to regional peers, and thus remain bearish.”
Other players say it’s a good time to take a long-term stance. “If you thought that the markets looked attractive for the long term at 22 PE, there is no reason why you should not buy at PEs of 16-17,” reasons Pankaj Razdan, chief executive officer, Prudential ICICI AMC. The sensex currently has a PE of 18.5, a price to book ratio of 4.6, and a yield of 1.43. Mr Razdan says a weekly outlook will be very difficult to make, adding that he did not see a major downside from here on. “Small investors and high net worth individuals can look at deploying their money in dips over the next two three weeks, looking at a long term time frame of 3-5 years,” he predicts.
“Different people have many different views at this time. For instance, an AMC may have one view on the sensex levels, while strategists may have a completely different view. However, we maintain that the correction has been a healthy one. While the long-term outlook continues to be good, a lot needs to be done to justify the levels of optimism which were present before the correction,” says an official with a top foreign brokerage.