Even if the sensex recovers in the next few weeks, the forthcoming disinvestment, second quarter results and the year-end redemption by FIIs have enough fire power to bring down the market to the current levels once again. In the worst case scenario the sensex could see a bottom of 2600-2700 by November-December this year.

Over the next few weeks, a recovery in the stock markets by a maximum of 10 per cent (i.e., the sensex gaining 300 points to reach around 3,200) cannot be ruled out. One, most key sensex stocks are at their lows with their valuations turning attractive for both the speculators and foreign institutional investors (FIIs).

The rupee-FII-Sensex game

For the FIIs the depreciation in the rupee from around Rs 42.50 to Rs 43.10 means Indian stocks are cheaper to that extent besides the 15 percent fall in sensex over the last one month. FIIs return to the stock markets after the rupee settles at a lower level. Consider this: May and June saw massive outflow of FII funds from the market, with the sensex dipping to the 3000-mark by end-June.

By mid-July, the FIIs returned when the rupee had settled at a much lower level of Rs 42.50. During July, the net FII investments added up to a positive Rs 212 crore or $ 55 million. The sensex reached a peak of 3488 during the month. Perhaps in anticipation of a rupee fall, FIIs started exiting even before the Indian forex market witnessed the burst of depreciation on August 11.

During the week-ended August 7, the net FII investment was a negative $ 7.7 million or Rs 32 crore. With the rupee depreciating by 1.5 per cent to 2 per cent and the sensex losing 15 per cent, it might be time for the FIIs to return for a short-term trading view. The sensex could then see a recovery of at least 200-300 points in the next few weeks, saymid-September.

Disinvestment could mean Rs 500 crore outflow

But by then the markets will have to start preparing for the public sector disinvestment programme, if the process starts as indicated by finance minister Yashwant Sinha yesterday. Disinvestment of PSU shares will mean an outflow of funds from the stock markets.

Alternatively, fresh funds may not flow into the secondary market, if investors go for the PSU shares on offer. Even on a very conservative estimate the disinvestment programme could raise Rs 500 crore in the first round, assuming that 10 per cent of the Rs 5,000 crore is what the government looks forward to by September/October. The markets could then see the sensex tied in the range of 3000-3200. Even if much damage is not done to the market, there will be an excess supply of paper. Any further push to the market will depend on the exit opportunity in the disinvested PSU shares.

The Q2 factor

Mid-October will once again see the second quarter results of corporateshitting the market. The first quarter performance was bad enough for the market. Will corporate performance revive in the second quarter. The second quarter is crucial as it presents a better picture i.e., six-months trends. Even if some signs of recovery emerge, the markets may not see any dramatic rise with discounting limited to select shares of companies which improve their performance. If the mood turns positive, the sensex could see a gain of 100 to 200 points.

Buyback replay

If the government allows buyback, October could also see the sensex moving up based on speculation. But most companies would prefer to buyback their shares when they are at their lows.

Therefore, the recovery could be limited to a short-period depending on whether the company buying back the shares is among the index heavyweights like Reliance or Tisco and what percentage of the floating stock do they purchase from the market. It will be a game of who gains how much and will not be a sign of shift in markettrend.

Year-end FII outflow

The catch lies in the gain around October. The sensex gain cannot be sustained, as it would be time for most FIIs to once again book profits ahead of their year-end accounting closure (December).

This is when the markets will see a much lower bottom, depending on a host of other factors like whether the recovery in industry is sustainable and export growth picks up. The turnaround in the markets, if any, could be seen only in the last quarter of the year. There will be many losers and doomsayers, but the winner will undoubtedly be the contrarian.