It points out that one major indicator of the strength of the current rally in stock prices is the declining net long position which shows that most of these purchases are delivery-based and not speculator or operator-driven.

FIIs "have dramatically increased their exposure to Asia, in light of the region's improving fundamentals. This positive forecast, combined with the recent strength of the Dow Jones, has made US-based investors consolidate gains in their domestic market and reallocate some of their assets to Asia and India," KPMF notes.

It mentions that stocks which "shone and sparkled with sharp appreciation" were not the growth stocks in information technology, pharmaceuticals and FMCG sectors which had outperformed the market index over thepast two to three years but they were the "beaten down" cyclicals in the engineering, refining, steel, telecom, petrochemical and cement sectors, referred commonly as `value' stocks.

The reason value stocks did well, according to KPMF, is that they were available at attractive price to earnings and price to book value ratios. Besides, investors "were reorienting their heavy exposure to the growth stocks and balancing it with more manufacturing, capital-intensive value stocks."

As a result, stocks of well-managed companies such as L&T, Bhel, BPCL, HPCL, Reliance etc, recorded maximum increase in market value in the month of May. Growth stocks have not matched the price appreciation in value stocks, says the KPMF review.

On the short-term market outlook, KPMF observes that FII portfolio flows would be the key factor affecting market sentiment. "A hike in US interest rates could lead to an unwillingness amongst US-based investors to take aggressive overseas positions."

Vice versa, even "modestallocations" could take the stock market into a higher orbit.

At KPMF, the emphasis on growth stocks generating high return on capital employed in relation to their cost of capital and higher growth rates than their industry peers have resulted in a portfolio mix of 65 per cent growth and 35 per cent value stocks.

In the near future, the portfolio composition of KPMF's diversified equity funds is likely to change to 55 per cent growth and 45 per cent value stocks. Over the next three to five years, KPMF believes, high-growth, non-cyclical stocks will, however, outperform economy-related stocks.