Back to basics

Over the past fortnight, the BSE Sensex and NSE Nifty have increased by 4.8% and 3.5%. The rise from lows of end July '02 is likely to have been supported by a buoyant U.S market. Over the past month, the U.S S&P 500 is up 18%. Also, with monsoon making a revival market concerns on drought have been allayed.

We had been optimistic on the markets since beginning of the new fiscal, as the economy staged a revival in the last quarter of FY02, growing by 6% YoY. Despite the hurdles, economic momentum does not seem to have been lost. As per reports, the core industrial sector, representing 27% of the index of industrial production (IIP), has registered a growth of 6.5% in the first four months of FY03, as compared to 1.1% in the same period last fiscal. Also, over the past quarter, events that shackled investor confidence abated. Gujarat communal riots were brought under control, Western Frontier border tensions eased and travel advisories have been withdrawn.

However, coming out of the tense 2 months, domestic markets had to contend with a global disliking for equities, as U.S markets went into a tail spin. Questions on sustainability of domestic economic revival arose, as rainfall in the country was 30% below the long-term average. Not helping the situation was the attention given to 'drought' by the media. Fresh phase of rainfall across the country, over the past fortnight, have allayed some of the fears. Having said that, rainfall for the season is likely to register an estimated 20% decline over the long term average.

Since beginning of the fiscal, markets, back-to-back, have been running into fresh concerns. But, over the past week, markets have suddenly found themselves in a vacuum. Consequently, with absence of any immediate triggers, participation on the bourses has reduced. Also, mid-way in a quarter, earnings season is some time away. Therefore, we reckon, investment decisions are likely to revert to fundamentals and valuations, which could bring back the blue chips.

Fund (Rs m)	Jan '02	Feb '02	March '02	April '02	May '02	June '02	July '02
UTI	511,510	519,440	514,340	509,830	487,060	463,960	457,870
Bank sponsored	40,730	41,900	39,700	38,530	38,810	39,120	41,340
Institutions	46,950	48,920	42,340	43,810	44,930	45,770	47,480
Private sector	441,960	457,880	409,560	436,140	451,510	458,180	477,240
Total	1,041,150	1,068,140	1,005,940	1,028,310	1,022,310	1,007,030	1,023,930

The BSE Sensex, having risen to 3,700 levels prior to the budget, has been on a decline since February end. Mutual funds are among the influential market participants. Point-to-point, from February '02, assets under management has dropped by Rs 44 bn. This is primarily due to Unit Trust of India (UTI). The table indicates that assets under management at UTI have declined in all of the last five months. While other fund houses have experienced an increase in assets under management since April '02. Disappointment with the budget and start of communal riots is likely to have led to the sharp outflow in March '02 leading to the drop in benchmark indices.

UTI is facing redemption pressure with maturity of assured return schemes in the current fiscal. The outflow has overweighed gains made by other funds. With shallow market participation, redemptions at UTI is likely to have pulled down bourses, as the fund liquidates blue chip holdings. Further, increase in assets of other funds may not necessarily have led to increase inflow into the markets. Private fund managers, it is believed, are holding sizable cash positions, as they wait for uncertainties to subside. Among the concerns on the horizon is the upcoming elections in Jammu & Kashmir and possible elections in Gujarat. Consequently, fund managers could take a step-wise approach to investing in the markets.

Among possibilities to lift domestic sentiment could be a rising -- although temporarily -- U.S stock market, as America approaches September 11, which could result in sentimental buying. Domestic bourses are nearing the festive month of Diwali and historically tend to perform better in the run up to the festive season.