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June 2011

As expected the market took a breather in the month of April after a bounce of 9.4% in the month of March. Markets fell in a volatile month dominated by stock specific action amid January-March corporate earnings releases. Dragging the markets down were disappointing earnings / guidance reports from index majors RIL, Infosys and Wipro. Heavy selling during April futures contract expiry and fear of higher-than-expected interest rate hike by the RBI in its annual policy statement also pulled down the market. A sharp fall in shares of RCom, DB Realty and Unitech after a special court of the CBI rejected bail petitions of the companies' officials in the 2G-spectrum-allocation case, also affected the markets. Losses for the markets were capped on intermittent strong domestic and global cues mid-month. Strong earnings reports from some corporates including HCL Tech and HDFC Bank also helped the markets in the month. Strong institutional buying by FIIs, worth Rs 7,018 cr in April compared with a net buying of Rs 6,967 cr in March also helped the stock market in the month (source SEBI).


Small and mid cap shares fared better in the month compared with their large cap peers on strong buying activity seen in these counters. BSE Smallcap index was the highest gainer, up 6.6% among BSE sectoral indices in the month while BSE Midcap index rose by 3.2%. BSE FMCG Index rose 4.4% followed by BSE Healthcare index, up 3.5% as investors preferred to take safe bets amid economic uncertainties. BSE Realty index lost the most, down 6.7% over the past month. It was followed by BSE IT index, down 6.2%, as sentiments in the sector were hit by lower than expected results by Infosys and Wipro. HCL Technologies, however, bucked the trend and emerged as top gainer on Nifty (up 9%) on the back of strong quarterly earnings.


We expect interest rate sensitive sectors to be affected after the increase of 50 bps in key short term policy rates by RBI. We reckon Q4FY11 results from infrastructure and realty companies would be below expectations; however the same has already been priced into their current valuations. Other factors like state elections and possibility of hike in domestic oil prices could weigh on the market. The market is expecting acceleration of key reforms and partial deregulation of fuel prices post the state elections. Any disappointment on that front could lead the market to break its range on the downside and correct meaningfully. Global factors such as commodity prices and global liquidity situation post QE II will also have significant bearing on the market. The market is delicately poised at this point in time and the positive / negative outcome of the above events will decide the direction of the market in near term.

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