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Looking for support…

Jun 22, 2002

After two consecutive weeks of positive closing, markets once again dipped. It seems investors' could not hold back their temptation to book profits. With worries previously dogging bourses left behind, investors' are waiting for fresh triggers. The upcoming earning season could bring much-needed cheer but is likely to coincide with confession time in the U.S. Climbing over wall of worries one could have expected a more spirited performance on the bourses this week. However, with indices rising over the past two preceding weeks, investors' are likely to have cashed on to their gains. Having said that, much of the pessimism seems to be emanating from foreign institutional investors (FIIs). June '02 is likely to be the third consecutive month of FIIs' being net sellers in the market. This category of investors' have pulled out Rs 4.8 bn in the first three weeks, which is approximately three times higher than the amount pulled out in each of the previous two months. The last time FIIs were net sellers of equities for three straight months was during election time in 1999 (August-October).

With U.S markets exhibiting vulnerability, foreign investors', one expects, are likely to scout for more global opportunities to diversify portfolio risk. Consequently, emerging markets, as an asset class, could have become more attractive, which could indicate that India is missing out on portfolio investments. But key emerging markets have registered negative returns over the concerned three month period. The basket of indices have returned between -1% for Hong Kong and -18% for Brazil. Has the rally in gold sucked all the dollars? Gold prices are higher by 6.2% since April '02.

We had indicated last week that the economy is on an upswing. As per latest reports, the six core industries part of index of industrial production (IIP) registered 5.5% growth in May '02 as compared to 1.7% in May '01 but lower than growth in April '02 (5.9%). Besides FIIs, troubles at UTI, the country's largest mutual fund, could also be causing excess supply of equities.

As per reports, three schemes of the fund, namely Institutional investor Special Unit Scheme 97, MIP 97 (II) and MIP 95, mature between June and August '02. The Finance Ministry has indicated that all redemptions will be met, as they have been in the past. The shortfall in meeting redemptions is estimated at Rs 6.5 bn to Rs 10 bn. Reports seem to suggest, UTI has still to tie up finances for meeting redemptions. State Bank of India, due to ownership status, reportedly, has volunteered to extend a loan to the beleagured fund at 2.5% below prime lending rates (PLR). The line of credit for Rs 10 bn is backed by Central Government guarantee, which has allowed for the softer interest rate. Just to add unitholders are not complaining. Redemptions, coupled with failure to tie-up funds could lead to an equity overhang undermining any effort to rise by the indicies. Having said that, market fundamentals, as indicated last week, continue to hold good.

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