The four-week long large-cap rally was halted this week by its old foe – "market correction". With some of the macroeconomic factors like inflation, also turning slightly adverse, the correction might last a little longer. The good news for investors was that mid-caps, particularly the Pharma and IT stocks, are beginning to gather a head of steam.
The benchmark indices dipped this week, the Nifty by 0.64 per cent and the Sensex by 0.60 per cent, primarily due to a large downward correction on Thursday. The broad S&P CNX 500 index however gained, albeit marginally by 0.11 per cent. The CNX Mid-cap 200 put in the best performance for the week, gaining 1.53 per cent on the back of a strong showing by Pharma and IT mid-caps on Friday.
The BSE IT dipped 2.56 per cent during the week primarily due to a correction in the large-caps like Infosys and Wipro. Moreover, the correction in the IT index was due after the index had seen a near 12 per cent rise over the past 5 weeks. Pharma stocks had a very good week. The BSE Healthcare index rose 3.33 per cent during the week, thereby continuing with their strong recent showing. While the heavyweights like Ranbaxy and DRL have risen on account of investors' expectations of global opportunities that exist for Indian companies in the US and European markets, Glaxo and other MNC pharma companies have participated in the bull run on expectations of increased benefits in the new product patent regime post-2005. Finally, the mid-caps are all banking on the growth prospects of the generic drug market.
FMCG stocks were due for a correction after their phenomenal rise over the past month. Between August 23 and September 20, the BSE FMCG had risen 14 per cent. This week the index fell by 2.41 per cent. However, there is still considerable long-term gain potential and this could be seen once the correction phase gets over. With crude prices again shooting through the roof, the petroleum stocks were under strain almost throughout the week. However, a strong performance by the public sector banks helped the BSE PSU index post marginal gains of 0.23 per cent for the week. The Government's positive statement earlier in the week, that interest rates in the medium-term were expected to be stable, helped banking stocks gain considerably this week. The BSE Bankex's 2.56 per cent rise reflected this.
Volumes rose on the bourses, but were mainly FII inflow driven. The combined turnover on both the BSE and NSE rose approximately 8.4 per cent over the previous week's levels. FII inflows, however, touched one-month highs with net inflows of Rs 876.8 crore for the week. MFs, however, continue to remain cautious. Till Thursday, net outflows for domestic mutual funds as a whole had touched Rs 109.05 crore.
Outlook
Given that the BSE Bankex has gained 12.8 per cent in the last month, banking stocks could come in for correction. Movements will also depend on the way inflation and therefore G-sec yields behave. With the second quarter results due in another week's time, some banks have already started issuing profit-warning statements. Not surprising, given that debt market volatility has robbed the banks of their treasury profits.
If advance tax payments are any indication then steel stocks look a good bet, as do the auto stocks. However, the auto stocks are also sensitive to interest rate changes, especially given their dependence on cheap finance, and that is something that will also have to be kept in mind. Pharma mid-caps are expected to move up on the back of robust drug sales in the generics market.
Finally a cause for concern could be the high FII inflows. As long as they are gung-ho about the prospects of Indian equity markets, the forward momentum is expected to continue. However, any sign of panic could subject the markets to a steep correction.
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