Stock trends to look out for in 2008

Why does the stock market go up and down? Theses fluctuations occur partly because companies make money, or lose money, but it is much more involved than that. A stock is only worth what someone will pay for it. Usually, if a company makes a lot of money, its value rises, because people are willing to pay more for a company's stock if the company is doing well. There are many other factors that affect the value of stocks. One example is interest rates, or the amount of money you have to pay a bank to loan money, or how much it has to pay you to keep your money in their bank. If interest rates are high, stock prices generally go down, because if people can make a decent amount of money, by keeping their money in banks, or buying bonds, they feel like they should not take the risk in the stock market.

With stock valuations factoring in high growth expectations, price gains from here on may be moderate, at least for front-line stocks. Looking at the trends

Liquidity: With domestic investors (insurance companies, mutual funds, retail) finally acquiring an avid appetite for equities, the leading names of India Inc may continue to receive buying support on every significant dip. Buying interest from domestic investors has reduced the Indian markets’ vulnerability to global corrective phases recently and this trend may continue into 2008.

Mid-cap picture: While the Sensex and the Nifty may merely coast along, mid-cap stocks may continue to sizzle in 2008, for three reasons.

• One, with interest rates set to peak, if not eventually decline this year, mid-sized and smaller companies could receive an earnings boost.

• Second, as last year’s rally has already stretched PE multiple for frontline companies, the price-value equation is now more favorable for mid-caps.

• Third, recent months have seen a surge in corporate actions by smaller companies. Institutions have made significant purchases in select sectors through the block deals route.

New areas: Strong resurgence in urban income is now a proven fact and better agricultural growth this year will likely drive rural spending. This may trigger new investor interest in domestic and “consumption”-related themes this year. Equity broking firms, financial services companies and banks may be a good proxy to piggyback on the swelling appetite for consumer goods and all forms of investment. Media stocks, which are catching up recently, remain good picks for investors who seek growth, albeit at a high price. Realty companies, both national and regional, may witness further re-rating as interest rates cool off, and new investment vehicles such as REITs redirect funds into this sector.

A few more things are on the anvil. Margin trading and securities lending have been introduced with adequate checks and balances. The Central Listing Authority has become operational to provide an independent entry-point scrutiny of the corporates to be listed.Structural consolidation, infrastructural improvements, product-innovation, refinement of regulations, and integrated surveillance should be some of the thrust areas for planned action in the days ahead. So lets see what lies ahead for stock market in India.