Wall St Princes in trouble, Maharaja sitting pretty

Fed’s $41 billion injection on Friday may prop fund flows

MUMBAI: The Princes of Wall Street have stopped dancing, but the music may well continue in the local markets.

That’s because the Federal Reserve’s move to inject $41 billion, the largest single-day infusion of funds into the US markets since the subprime crisis early this year, may boost global liquidity again.

In August, the US central bank had pumped in $38 billion and its European counterparts much, much more, to unfreeze credit markets there.

On October 19, finance minister P Chidambaram told a gathering of investors in New York that part of the liquidity injected by the global central banks “has spilled into India and certain other countries” pumping up the markets there.

Says N Sethuram Iyer, CIO, Shinsei Investments: “The subprime issues have triggered off higher liquidity internationally and more flows into the Indian markets.”

While marketmen say it’s not easy to predict when the latest injection will find its way to India, they point out that India and China remain the oases of high growth amidst a slowdown staring at the global markets.

Manish Sonthalia, equity strategist, Motilal Oswal Securities, says there is not much concern in India about the Citi and Merrill casualties. That’s because, Sonthalia said, the second-quarter results have been encouraging.

“If you look at the Q2 numbers, there has been a 14% growth in topline against an estimated 13%; a 22% growth in EBITDA against 20% expected, and a 27.5% PAT growth versus 16% expected.”

With this, Sonthalia said, the Sensex earnings estimates would stand revised from Rs 850 to Rs 875 for the current financial year and from Rs 1,000 to Rs 1,025 for the next.

Anil Advani, head of research at SBI Capital Markets, says it is difficult to put money in an economy that is requiring a bail-out.

“The actions and reactions in the US suggest growth there would be flat. Compare that with the prospects in India and China. Money will eventually chase these stories,” he said.

Shinsei’s Iyer said Indian companies are likely to face only indirect fallout of the sub-prime problem such as a US slowdown impacting export-oriented companies, larger inflows of funds resulting in rupee appreciation on a higher scale etc.

“In the short term, the markets are going to be driven by money flows more than any other factor,” he said.

A glimpse of the Indian market’s indifference to the US developments was visible on Friday.  Sensex was the only index that closed positively, rebounding over 600 points from the day’s low to end 252 points plus.

Traders said FII futures figures of Thursday were positive, triggering buying in the last hour.

Late on Thursday, the discount on Nifty Futures had risen to 45 points fuelling speculation that shorts may be building up.

However, FIIs had net bought index futures worth Rs 45 crore. This suggested that there were no shorts, encouraging traders to buy.

Nifty November Futures ended Friday at 5955, a premium of 23 points to the spot close of 5932.

The steep rise in the stock market over the last two months has been largely contributed by inflows from FIIs. And bulk of this money has been poured into a few large-cap stocks, which have driven up the Sensex nearly 50% from the low of 13779 touched on August 17.

In October alone, they bought equities worth Rs 20,591 crore, according to Sebi figures. That’s more than half of their net purchases for the whole of 2006.

What about negatives or amber signals?

At Friday’s close of 19976, the Sensex is trading at a PE of 25.6 times trailing earnings (FY07), which is next only to China among the major markets.

Shinsei’s Iyer says at current levels, the Indian market is fully valued. “If it keeps rising without fundamental triggers, there would be concerns,” he warns.

Another factor fuelling worries is the prospect of $100 oil. Indeed, says Motilal’s Sonthalia, this is the big risk. “The Fed and other central banks are now more concerned about inflation rather than growth. So, they will be worried about oil prices. It is definitely on everyone’s mind,” he said.