Old economy stocks help bullish phase

MUMBAI, MAY 20. The stock markets are likely to remain bullish in the coming days as most of the participants as well as investors have welcomed the decision of the Securities and Exchange Board of India (SEBI) to ban the carry-forward trading system that had characterised Indian bourses for decades. Now the market participants are looking forward to more fine-tuned stock futures products.

``After crossing the major resistance of 3620 to 3650 Sensex is likely to move towards the retracement level at 3780. So short term strength is visible on bourses, said Mr. Jignesh Shah, Strategist, ASK - Raymond James Investment Management. According to him old economy stocks show major strength and new economy stocks may move side ways.

``We are optimistic about the markets in the medium to long term considering the possibility of a recovery in the US by the fourth quarter, good monsoons and the Government's resolve to go ahead with the reform process despite internal and external pressures,'' said Mr. Sunil Shah, Director, Evergreen Broking. He added that the Morgan Stanley Composite Index (MSCI) recast will not have a significantly negative impact on the Indian market.

Brushing aside the ban on carry-forward, Sensex moved up by 2.7 per cent. The Bombay Stock Exchange (BSE) 30-Share Sensitive Index (Sensex) moved up by 95.26 points at 3655.03 from 3559.77 in the previous week. On the National Stock Exchange (NSE), the S&P CNX Nifty Index gone up by 31.90 points at 1174.30 points from to the previous Friday's close of 1142.40. The gains were largely led by the old economy stocks. Technology, media and telecom (TMT) stocks were largely stable last week. Foreign institutional investors (FIIs) have been buyers for Rs. 482 crores during the last five days while the mutual funds were net sellers for Rs. 50 crores during the same period.

Finally the uncertainty in the markets came to an end this week with the ban on carry-forward (Badla) system from July 2. The outstanding positions as on May 14 can be squared up upto September 2, while the positions taken after May 14 will have to be squared up by July 2. ``This step will bring the Indian markets on a par with the global markets,'' said Mr. Sunil Shah. The step was indeed welcomed by the FIIs which continued to be net buyers in the markets. A long standing demand of many market participants has been for a uniform settlement period across all exchanges, which also has been met. This should remove the inter- exchange arbitrage and the shifting of positions across exchanges, so common earlier.

The removal of circuit filters for individual scrips is also a step in the right direction. The regulator has also stated that it would introduce circuit filters for indices as is prevalent in the US. This will considerably improve liquidity as sellers emerge at substantially higher levels and buyers at lower levels. There will be options introduced for 15 to 20 individual stocks in addition to the index futures, already in place. Mr. Shah added, ``The transition period is likely to be painful but these steps will do a lot of good for the markets in the long term, especially for the small investor who has always been taken for a ride in these markets.''

The U. S. Federal Reserve announced a cut in the interest rates by 50 basis points on May 15. The Fed Chairman, Mr. Alan Greenspan, has also talked about additional rate cuts if necessary to boost the US economy. Thus the U. S. interest rates have been reduced by 2.5 percentage points this year to 4 per cent.

The interest rates in India too are likely to be reduced further given the global trend. ``This is likely to provide a fillip to Indian Industry to invest in capital formation,'' said Mr. Shah, adding, ``it will also ensure that Indian exports, which had grown by 20 per cent last year, remain price competitive in the current global environment.

The MSCI would adjust the market capitalisation of a company's equity securities to reflect the level of free float. MSCI defines the free float as proportion of share capital that is deemed to be available for purchase in the public equity markets by international investors. In other words, free float is the quantum of stock available to overseas investors. Examples of shares excluded from free float are stakes held by Governments, corporations, controlling share holders and their families, the companies' management and shares subject to foreign ownership restrictions. Companies like Reliance Industries, Reliance Petroleum, Infosys, Satyam and HDFC have increased their FII limits to 49 per cent.

India's weightage in MSCI has dropped sharply on Saturday by 3.01 percentage points to around 4.49 per cent from 7.5 per cent earlier. The fall in India's weightage in MSCI index has been sharper than the market expectations of 2 to 2.5 percentage points. Among the emerging markets South Africa tops the list of countries whose weightage in the index has increased, with a 4.33 percentage points rise. This is followed by South Korea (3.27), China (1.65), Taiwan (0.73) and Israel (0.59). Reliance Petroleum has re-entered the Index exactly one year after being dropped. In the recent revamp of the Index around 14 Indian companies were dropped. Though some of the FIIs follow the MSCI index as a benchmark, the proportion is small and hence the FII inflows into India will not be severely affected by such a move.