Rally in stocks may be short-lived

By Oommen A. Ninan

MUMBAI, JULY 9. The outlook for the stock markets looks uncertain in the coming days as foreign institutional investors (FIIs) and domestic institutions have been net sellers. The Unit Trust of India is also expected to effect sales to book profits for making dividend payments. The dividend on US-64 scheme alone is estimated to require nearly Rs 2,100 crores.

``The markets' current rally is conclusively over,'' said Mr. Shankar Sharma, director, First Global, a leading securities firm. The move that started from 3800 to 4900 has run its course. ``Investors should get out of all long positions in the market especially in the ICE sector,'' he said. Select stocks in the old economy sector such as pharmaceuticals and hotels look good. But other than that the market will give a lot of worry in the next couple of months. According to Mr. Sharma, the Nasdaq run is also over. He added, ``it was a corrective rally off the downfall from 5000 to 3000 and that has exhausted itself completely.''

The Bombay Stock Exchange Sensitive Index (Sensex) closed on Friday at 4905.94, up by 157.17 points as compared to the previous week's close of 4748.77. The undertone on bourses was, however, cautious because of the large net long positions on BSE, showing that the upward movement of indices was due to speculative activity rather than due to any investments by FIIs or domestic funds. On Friday, when the Sensex closed above the 4900 mark the FIIs were net sellers by Rs. 35.5 crores. On BSE the carry-forward (badla) rate was at 12 to 14 per cent. The Automated Lending and Borrowing Mechanism (ALBM) of the National Stock Exchange (NSE) recorded a carry forward rate of over 16 per cent. When the returns are higher on NSE, the ALBM system funds (financiers) may move to NSE from BSE.

``I think the market is trying hard to breach the 4920 resistance level but it has found difficult to do so thus far. There are divergent views between institutional players and the speculator community about what to expect from Infosys in terms of first quarterly numbers. Clearly the latter is very optimistic and if their expectation is more than met the market will trade up significantly. However, I believe that a conservative view is more correct and I am not very positive on the market for the coming week,'' said Mr. Aswani Agarwal, equity analyst of Kotak Securities.

In an article how the market is expected to behave over the next few quarters Mr. Prateek Agrawal of SBI Capital Markets argues that both technology sector and real economy could show strong growth rates. ``Earnings in the last quarter were good and this trend should be maintained over the next few quarters,'' he said. Commodity prices have been on an uptrend.

Even if prices stabilise at current levels, there would be an uptrend in profits because commodity prices in the same quarter of previous year were lower. With improving profits from the commodity companies, more money would flow into these commodities. This in a way, has been happening. In the recent bear phase, the valuations of the technology sector fell much more as compared to the real economy and valuations converged to an extent. What would happen to the broad market? Given the high degree of investor confidence in technology stocks, Mr. Agrawal opined that it is likely that tech stocks would again lead the rally. However, this time around, the rally would be more broad based. There would be interest in the real economy, particularly in sectors like pharmaceuticals and metals where the outlook is good and can be sustained over time.

Valuations in the pharma sector are also attractive and Indian pharma companies such as Cipla, Dr. Reddy's and Ranbaxy have added a new revenue stream to their businesses (from operations like research) which has not yet been fully valued.

Meanwhile, in the broader market, there are many instances of profits and profitability improving thanks largely to more favourable pricing. Oil production, metal and paper stocks come to mind. Though last year profit increases were led by technology stocks in general, this year commodity stocks may yield better profit growth rates in some cases than technology stocks. However, the ``cyclical'' uptick is not likely to be sustained over time, though one would expect the uptrend to last for around 18 months.

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