A few companies that would prominently figure in this category are Great Eastern Shipping, Sesa Goa and Tata Steel.

Trading levels shrink: There has been a shrinkage in trading levels on the NSE and the BSE in terms of the number and the value of shares traded. This is partly because of the decline in the level of day-trading, as equity prices have remained locked in a narrow band for several months now. As inflows from the FIIs have also trickled to lower levels, day-traders have scaled down their activity.

In stocks of obscure companies with doubtful financial credentials, volumes have remained buoyant. A new set of such companies figures on the charts of such traders from time to time. This is a worrisome sign as traders and investors appear to be in desperate search of the next stock that could provide gains of the magnitude that several bluechip stocks delivered in 2003 and 2004. They may have missed out earlier and now seek to latch on to any idea that offers a prospect of ramp-up in price, quite ignoring the risks.

Better market breadth: What causes concern is that the flattening out of trading volumes appears to have happened despite a sizeable rise in the number of listed stocks of quality companies. Several IPOs (initial public offerings) from companies with a fairly impressive track record and which are potential investment candidates have enhanced the breadth of the markets.

As in a protracted bullish phase, the pricing of IPOs has become stiffer this year — Gokaldas Exports and Gateway Distriparks being notable exceptions — and leaves limited scope for gains on listing. The number of stocks with a market cap in excess of Rs 5,000 crore has increased four-fold to about 60 over the past two years. These aspects — new listings and more large-cap plays — have made the Indian market more attractive for institutional investors; the benefits are, however, likely over a longer term, as FIIs appear to be locking into gains of the bull market.

Still buzzing mid-caps and small-caps: This is one story that appears to have sustained momentum. Despite five bouts of re-rating over the past two-and-half years, stocks in the mid-cap- and small-cap space continue to sizzle. It is not, however, an across-the-board phenomenon any longer and is increasingly restricted to a smaller number of stocks. But even this has been adequate to push the CNX Mid-Cap Index into record territory yet again.

Over the past couple of years, every mid-cap rally has been followed by a firm undertone in large-caps. This trend, however, may not be repeated on the heels of latest bout of re-rating in mid-cap stocks. The pressure on earnings growth is likely to cap gains in large-cap stocks.

FII flows: In 2003, a surge in FII flows is what triggered the bull market. While the record inflows of 2004 did not have a similar effect, it did help equities retain their gains of the bullish phase. Despite buoyant inflows in February and March this year, equities have remained stuck in a narrow range. Early investors in the FII ranks appear to be taking profits on a part of their holdings and moving to less risky stocks.

If FII inflows surge as they did in 2003 after a sluggish start, only then may one more round of a liquidity-driven rally be in the offing. This prospect appears less likely due to several factors, such as rising US interest rates, limited room for rupee appreciation, increasing risk aversion and relative valuation among several emerging markets.

What is, however, encouraging from a longer-term perspective is the steady rise in the number of registered FIIs with SEBI — a process that started in early 2003. There has been a 10 per cent rise this year; so far, however, this has not translated into substantial inflows, unlike the case in 2004. The expanding base will, however, provide for greater stability in FII flows and ensure a healthy balance among institutional investors.

Sector preferences: With the market poised for moderate gains, the preferred sectors are engineering/construction and cement.

A rising order book augurs well for the former and points to healthy earnings growth over the next couple of years. This has been largely priced in. Any further accretion during this period would only strengthen the fundamentals of companies in this sector.

In cement, the problem of excess capacities is becoming a thing of the past, except in the South. Incremental capacity creation — other than those already announced — is likely to be done in a disciplined manner and only by Grasim, Gujarat Ambuja and ACC over the next three to five years.

Apart from these two sectors, IT majors such as Infosys, TCS, Wipro and Satyam, aggressive players for market share in banking such as HDFC Bank, ICICI Bank, UTI Bank and SBI, and stocks such as ITC are appropriate holdings in the large-cap domain.

Options for investors

IN THE backdrop of macro-factors that are likely to influence stock prices, investors could consider:

It is, however, likely to be interspersed with corrective phases that could at times involve sizeable declines.

This is why profit-taking at current levels on a part of the holdings — between 20 and 40 per cent, depending on risk preference — may be appropriate.

Preferred equity funds would be HDFC Long Term Advantage, SBI Magnum Contra, HSBC Equity, Reliance Vision and HDFC Top 200.

The spate of new funds is designed to boost assets under management and fee incomes.

For every new launch, there is an existing open-end fund — often from the stable of the same fund house — with a similar investment objective and track record that can be used to make a more meaningful investment decision.

The sheer size of the asset base of new funds is also likely to work to their detriment.

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