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Hoping for inflows: Stockbrokers monitor the BSE Sensex in Mumbai.

Initial reaction of the market this week to the election results could be euphoric. A large section of market players and investors would like to join a new, confident and not-risk-averse chorus.

The domestic investors, including institutions, who had sold off quite a bit of their holdings during the run up to the elections, may return as buyers, at least temporarily.

But there may be a role reversal for some of the FIIs. Overseas players, who had been buyers since March and did not have a long-term view, may be utilising the opportunity to book profits. For them, if valuation gets stretched further, and if the benchmark index moves up sharply in the short term, they will not hesitate to sell.

There were, however, another set of foreign investors who had been waiting for the political risk to go off the scene. They deliberately missed the bus that took the Sensex around 50 per cent on the recovery road.

The market generally had factored in a coalition Government based on pre-poll alliances. Market intelligence two weeks ago had ignored the general speculations of a need for post-poll alliances and new combinations.

Last week’s indices movement reflected continuation of a steadfast market bias that suggested emergence of a stable Government and continuity of economic and social policies.

Now that the bets have not failed, the market may tend to overreact in the first few days. Investors who had been on the sidelines may be encouraged to participate immediately in the hope of catching the bottom. It would not be surprising if the domestic players give the lead.

Overseas investors, who had already directed their fund to emerging markets, would be prompted to start allocations for Indian equities as uncertainty over politics are removed.

But hardnosed strategies may not be alike. Investment advisors indicate that many of the long-only players are still neutral on India based on economic situation and the current valuations of the top rung stocks.

But certain overseas funds in this category had mandated the local managers to enter and stay fully invested.

While long-short strategists are flexible enough to ride the surf, globally attention of a smaller number of such players is currently turned to India.

In terms of grabbing relative opportunities by the emerging markets in a year of an anticipated slow retracement in the developed markets, global investors have reacted differently.

For example, overseas portfolio investments’ flow to China, Russia and Brazil has been greater this year than to India. So, though higher flow of fresh global money or a larger chunk of new money might gradually be coming towards Dalal Street, there is limited chance of a deluge happening right now.

For a major directional call, particularly for the returns for FY 2011, the next possible clue may be provided by quality of monsoon and, later, by corporate results in the second and third quarter.

A sharp corrective move downwards, however, may not surface in the next few weeks even though prices of crude oil and industrial commodities and rupee movement could cause concern. Hopes of softer interest rates, higher investments towards infrastructure and rural economy would keep pessimism at bay.

Some strategists think the flavour of the investors’ move from now would perhaps be mid-cap stocks. Overseas investors, who lacked or had limited knowledge of this space during the rally that lasted till early last year, have equipped themselves with greater framework of understanding, tracking and analysing the stocks.

Response may be sent to jayanta_mallick@thehindu.co.in

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