While many will thank US Federal Reserve chairman Ben Bernanke’s rate cut for the Sensex jump and the surge in foreign investment over the last week, the euphoria has not percolated down to the market. Consider these figures. The Sensex, which has 30 top blue chip shares in its portfolio, has surged by 8 per cent during its 1,000-point plus journey in the last six sessions. On the other hand, small and medium-sized shares showed a much slower rise in the same period.

Take for example, the BSE Small-Cap Index which represents 468 small companies. This index has risen just 2.82 per cent during the last six sessions, indicating that hundreds of small companies have missed the bull run. The BSE Mid-Cap index, which represents 274 companies, fared slightly better by showing a rise of 5.7 per cent. The BSE Dollex-200 index (calculated in dollar terms) rose just 4 per cent in the same period.

The Sensex currently trades at valuations of 19.2 times of FY08 earning estimates and 16.3 times FY09 earnings estimates. “These valuations are at the upper end of the band, especially given the slowdown possibility; it clearly calls for caution at these levels,” said SG Private Banking (Asia Pacific) global market manager (Indian Sub-Continent) Balakrishnan Kunnambath. The top 10 stocks in the Sensex pack have shot up by 8-15 per cent in the last six sessions. The gain would have been much higher had some of them not reacted due to profit-taking today. Reliance Industries Ltd (RIL), the most valuable company in India in terms of market capitalisation, has risen 12.7 per cent since September 18. Reliance Energy, belonging to the Anil Ambani group, has surged 10.5 per cent in the same period. Bharti, ICICI Bank and HDFC, have zoomed 10-15 per cent.

“The movement in the Indian markets over the last month has been backed by strong liquidity inflows. We believe this phenomenon is part of a temporary de-coupling effect experienced by the Indian markets as the core India story is based on its domestic consumption and infrastructure growth. We believe though the Indian markets are tending towards fair valuations... the FII inflows into India will decide the trajectory from hereon,” said Kotak Securities Ltd managing director A S Narayanan.

Stepping up their presence in India, FIIs have invested over $1.80 billion — taking the total for 2007 to over $11.3 billion — in stocks since last Wednesday when the US Fed cut interest rates to pull the economy out of a recession and tackle housing and subprime woes. “FII money is going into top blue chips. The rally should have spread to the broader market much earlier. Select stocks in the Sensex have shot up to dizzy heights. Investors should be careful,” said top BSE dealer Pawan Dharnidharka.

“Our house view continues to remain cautious on the overall market as the valuations are in the expensive zone and growth is tapering off. However, strong liquidity will continue to chase risky assets and drive valuations beyond fundamental fair valuations,” said Kunnambath. The market is expecting more FII inflows this year and is in for some volatile periods as the Reserve Bank of India (RBI) is expected to take measures to neutralise the inflow impact on the economy and the rupee through various measures.

The Big Leap

• w Sensex takes just five sessions for its 1000-pt journey

• w FIIs invest over $1.8 bn since Sept 19

• w Mid-cap and small-cap stocks rise at slower pace

• w Select blue chips in Sensex rise to dizzy levels

• w Hundreds of small firms yet to show any big movement