Markets: Dolly good or optimistic caution?

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Is it time to pop the bubbly and celebrate the new bull-run, or is it time to sit back and await the recoil after an infatuation? It is certainly party time for those who took positions when the market was around 12,500 level. For them, it is time to celebrate their belief in the fact that the markets at 12,500 levels had created value opportunities. Even market gurus like Mark Mobius, rather cautiously, said India was looking attractive in valuation terms. Savvy market operators point out the rally was fuelled by falling oil prices and the UPA winning the trust vote.

Oil was down 35 cents at $128.07 a barrel in Asia on 23 July, after falling more than $3 to a six-week low in the previous session as the threat of hurricane Dolly to oil drillers and refiners eased, and concerns over faltering US energy demand increased.

Overseas institutions were sellers in equity on Tuesday. They did come back on Wednesday, but are not gung-ho as yet. Au contraire, "Even leaving aside politics, against this unfavourable economic backdrop, the room for tough reforms is likely to be limited. It has reached the point where earlier elections look to be the better option," said Sonal Varma in a Lehman Brothers report.Broadly, it is a rally that saw combined buying, more so by domestic investors.

At the end of 2007, investors went on a buying binge awaiting overseas investors to join in and gain from early presence. When the sheer optimism laced sentiment faded, markets tanked. At present, fundamentally there are little changes in the dynamics. Cooling oil prices will put less pressure on the fisc. As regards to domestic inflation, status quo exists. Since domestic retail oil prices remain controlled, only a huge correction will force the government to re-track petro prices. The threat of another price hike looms large. Optimism over pension and insurance reforms being expedited is well placed. However, at the moment, the market momentum is being determined by pure money inflow from overseas investors. Funds pouring in from pension funds might take time. So a further surge in the markets is overruled.