Consolidation in the markets

Consolidation in the markets

India’s gross domestic product (GDP) could grow by at least 9% in financial year 2010-11, the finance minister has said in a mid-term analysis of the economy. This comes on the back of a better-than-expected 8.9% growth in GDP in the September quarter. Despite this, Indian markets have been listless in the past few trading sessions. So far this week, the BSE 500 index has declined by 2%, and in the past one month, it has corrected by over 8%.

The markets have entered a much-needed phase of consolidation, after a sharp rise between early September and early November. While the broad market indices had risen by around 15% during that period, the rally lacked breadth, since it was fuelled largely by inflows from India-specific exchange-traded funds. Besides, there has been a large amount of primary market activity, which has affected inflows into the secondary markets. And the plethora of scams hasn’t helped investor confidence either.

There are an equal number of reasons why the markets should remain in the consolidation phase in the near term. First, foreign institutional investor activity slows in the December-mid January period. Besides, oil prices reached a two-year high of around $90 per barrel this week, and the high prices of the commodity would affect investor sentiment, especially for stocks and sectors that use crude and its derivatives as an input.

Margin pressures and risks to earnings estimates are already a concern. And while there may be a temporary lull in the primary market this month, activity in this market can be expected to resume next year, thanks to the strong line-up of public sector issuances.

What’s more, institutional investors seem to be overweight on Indian stocks, and this would limit the possibility of fresh buying. In fact, owing to relatively high valuations of the Indian markets, brokers such as Credit Suisse and Citigroup are recommending an underweight position on Indian stocks as part of their asset-allocation strategy for 2011.

While there are these headwinds, any correction in Indian stocks wouldn’t be too sharp, unless of course there’s a sell-off in global equities. This is simply because of the high growth on offer. Indian companies, riding piggyback on the strong GDP growth, are expected to grow earnings by over 20% in the next two financial years, the highest among emerging markets in the region. There would be ample money on the sidelines to take advantage of this growth opportunity if there is a correction

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