weekly market update

>> Friday, May 22, 2009

This week is one which will be remembered for the breaking of two records in as many days as the markets reacted with exchuberance to the ending of weeks of political uncertainty. 

The weeked announcement of the Lok Sabha election results caught most people totally off guard by returning a far more stable UPA government than had been previously anticipated by political or market analysts. As a result money poured into the markets as soon as they opened and before lunchtime on Monday the second upper circuit breaker had been breached for the first time and trading was suspended for the day after a 17% rise in both the benchmark indices. 

Tuesday then saw another record broken as the cash segment witnessed the highest single day trading volumes since the exchanges opened. The pattern of the day saw FIIs buying heavily (net $1bn) while domestic funds booked profits with slightly more enthusiasm, resulting in a very minor downward correction following a day of huge volumes and volatility.
The remainder of the week was characterised by new money flowing into the markets being offset by large scale liquidations as investors booked profits. Declines on Wednesday and Thursday were followed by a a modest rally on Friday, led by infrastucture and banking stocks. The net effect of the dramatic week’s trading was that by close of play on Friday the Sensex stood at 13,887 up over 1,700 points or 14.4%. The Nifty ended the week on 4,232 after gaining 561 points or 15.2%.
Where the markets go from here is a big unknown as the election results was so unanticipated that the market seems to be still catching its breath. 
The medium term prospects will of course depend on the budget and reform program which the new government announces, as well as global market developments. In the short term however there is a certain degree of concern (and rightly so) regarding whether current valuations are sustainable. On a P/E basis Indian markets are now more expensive than any of the other BRIC economies and this culd cause a temporary drying up of FII interest.  Some analysts are already calling the top of the recent rally and while this may be premature there is certainly significant downside risk for the coming weeks.

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