AS THE STOCK market reaches new highs, investors have reason to look ahead at 2005 with optimism and relief especially after the knock they took this May, post the election verdict. As last year, mid-cap stocks are primarily driving the ongoing rally with large-caps too beginning to attract investor interest. At their high, the broad market indices — the Nifty and the Sensex — have just about recouped their losses suffered after the fall from the highs of January, while the CNX Mid-Cap 200 Index is 22 per cent higher than its peak reached earlier this year. Clearly, investors see superior growth potential in the mid-caps; perhaps, this can also be seen as a vote of confidence on the ability of these companies to compete in the global market place.

The breadth of the mid-cap rally, from IT, textiles, pharmaceuticals, services to auto ancillary sector, has opened up more options for investors particularly the foreign institutions (FIIs). Of significance also is the spurt in the number of FIIs that have registered with the Securities and Exchange Board of India. There has been a 50 per cent rise in their number over the past three years and 23 per cent from this January. The increasing interest among the FIIs in Indian equities could mean larger flows; unlike in the past, the quantum of such investments may not hinge on what the top FIIs bring to the table. A more broad-based investor interest would also mean greater stability in the direction and magnitude of these flows. The FIIs are also major traders and as more come into the market, the effect of their buying and selling on stock prices could also be less volatile than in the past. Over the past three weeks, their daily involvement has been significant with the focus moving onto large-cap stocks from the mid-cap theme. In fact, the FII flows played a crucial role in pushing the Nifty to a new high.

Even without the FII funds that were lured by the equity offers of ICICI Bank, ONGC, NTPC, Tata Consultancy Services and other oil-sector PSUs, close to $4 billion has been invested through the secondary market. Only in 2003 was the quantum of FII flow better than this (at an aggregate level, the $7.9-billion FII flow this year is a record). If their interest continues to remain at this level over the next year, much of the gains of the 2003 bull market would be retained. This would make it the first bull phase whose gains have been held or built upon over such a long period. The gains of the bull runs of 1991-92, 1994 and 1999-2000 quickly dissipated for a variety of reasons and did not show the market in good light leading even to a boycott of equities by a large number of investors. If the checks and balances are tightened to guard against shenanigans that brought those bullish phases to a halt, the market trading at a new high could inspire confidence in investors to park more of their savings in equities. But investor expectations will have to be tempered by the likelihood of the market posting only moderate gains (not of the 2003 magnitude), and that, too, over a longer time frame.

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