The Hindu Business Line : Correction mode likely to stay

The market went into a correction mode last week after indicating in the second half of October that it might make such a move. This week too, Dalal Street may witness a downward trend. Some observers said the Sensex may plunge to 14,000 level in the short-term.

A marked increase in profit booking by a section of FIIs has changed the ball game, according to investment advisors to overseas funds.

MFs’ buying

In the past few weeks, fresh purchases from mutual funds slowed down significantly. But there were foreign investors who lapped up the additional supply.

Market intelligence suggested that last week a set of overseas funds, mostly new entrants, made fresh purchases and a another group of investors, who rode the earlier recovery, mopped up some of the available profits.

The rise in gross purchase and sales figures in SEBI-calculated FII daily investments data also confirmed this trend.

FII investments pattern last week indicated changes in strategies. Though liquidity has not declined globally, a kind of rebalancing of portfolios across the markets has begun to take place.

A few officials of registered FIIs here said in some emerging markets, including India, there are early signs of a turn in cycle. This has made some overseas investors cautious.

It is apprehended that in the current quarter earnings might not show a great improvement; in some cases it may even be lower than estimated.

The next IIP growth number may not be as encouraging as the last one. Interest rates are likely to trend upwards. Inflation may be on its way up.

As a result, earnings upgrades for some local equities are being postponed; and for some others earnings downgrades are taking place.

In the one- to two-month time frame, selling by FIIs could be an important feature on Dalal Street.

The quantum of net sales would largely influence the movement of key indices.

Day-to-day matching or overriding purchases by local investors could smother the downward movement.

Local investors may not suddenly turn buyers even though indices may come down. A section would love to book profits too. But none is expecting a severe sell-off or panic.

Probable buyers

Mutual funds may be short of cash but insurance companies are not. Other investors, such as high net worth individuals and retail, would also look for opportunities to move into better performers. This churning, however, may not help prime movers of the key indices.

It is anticipated that the next two to three weeks may witness the key indices remaining weak.

Instead of participating in a bigger equity asset bubble, as was projected, investors may have to reconcile to a sluggish end to the calendar year.

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