Shallow rally: will the trend stay or will stocks tank?

  • Manik Kumar Malakar, Hindustan Times, Mumbai
  • Updated: Nov 07, 2013 02:18 IST

The recent rally in equities, which took the 30-share BSE Sensex to an all-time high of 21,321.53 on November 3, has been restricted to a narrow range of large companies and largely bypassed the rest.

Experts are divided on whether this presents a good opportunity to invest in those shares that the rally has bypassed or whether this is a pointer to the fact that economic fundamentals do not support the rally, which is largely driven by the inflow of more than `30,000 crore of FII money, over the last four months. More particularly, the Sensex has gained 22% since falling to 17,448 in August.

“It would be premature to say that a turnaround has started until manufacturing growth displays a sustained uptick,” said Aditi Nayar, senior economist, ICRA.

“Yes, the recent rise in the markets has been skewed towards a few large-cap stocks in defensive sectors like IT, pharma and FMCG,” said Ankit Agarwal, vice president, Centrum Capital (see graphic).

FIIs have been on a buying spree since Indian growth rates, which have slowed from 8%-plus three years ago to sub-5%, still remain among the highest in the world. “They focus mostly on the frontline index stocks,” said Agarwal. Hence, the shallowness of the rally.

But FIIs could pull out of India if growth rates don’t pick up by the time US begins tapering its stimulus package. If that happens, the markets could tank.

A section of the market is also betting that Gujarat chief minister Narendra Modi will become Prime Minister next year. “Modi is perceived by the equity market to be a performer,” said VK Vijayakumar, investment strategist, Geojit BNP Paribas Financial Services.

Goldman Sachs, in fact, has raised its Nifty target to 6,900 in anticipation of such an eventuality.

The second half of the year is expected to be better than the first. So, the more optimistic section of the market believes that stocks will rise further from their current levels and the rally will spread to the broader market as the positive impact of the good monsoon begins to kick in in rural India.

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