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The year is done and the numbers are in. The Indian markets have had a great year with the S & P Nifty Fifty Index up 40 % and the BSE Sensex up 47 %. But, like all heady market stories go, this one has seen its fair share of ups and downs, at times giving even the most staid of the investing crowd a lot to stomach in terms of volatility. To get a better idea of what the wise men of the fund industry went through, take a look at the chart below.

click to enlarge
BSE Sensex 1-yr chart
_bsesn
How's that for volatility? BSE Sensex peak to valley drop of 30% in May 2006.

But, all said and done, the chart above is the reflection of the superb growth story that is unfolding in India, which is finding favor with plenty of investors around the world, as evidenced by the market's tendency to claw its way back from devastating drops. After all, markets never go up in a straight line, right?

Just as the old year is packing up, there is already the mad rush by the channels showcasing market predictions by analysts and fund managers alike for the new year. Distilling the multiple opinions voiced into one coherent short paragraph about the market's direction in the coming year took some time but this is what it conveys.

The market is fairly valued at current levels, but value names can be mined through intensive research in the mid and small cap space. Wait for earnings to get a better picture of what might transpire in the days ahead.

An unpleasant catalyst for another dramatic monetary policy move is brewing up on the inflation front with the current reading at an uncomfortable 5.6 %. Another key factor to keep an eye on is the extreme squeeze on liquidity in the money markets, with call money rates in inter bank lending ruling at close to 20 %. These kind of numbers belong more to a retail discount store's mark downs rather than money markets and economic indicators.

The factors mentioned above cannot be wished away quietly, no matter how the bullish camp paints it. Higher rates, apart from eating into corporate profits, are also going to put a lid on bank lending, which in turn will cool down demand from consumers for everything from cars to houses.

On the market front, trader spirits perked up on the surprise rally in the IT and Bank sectors, after persistent weakness over the last two weeks. HDFC Bank (NYSE:HDB) and ICICI Bank (NYSE:IBN) were the big movers in the group, up 6.4 % and 4 % respectively for the week. The market is rife with talk about possible buy outs, M&A and the like in the mid-cap IT space, similar to Oracle's (NYSE:ORCL) move on I-flex, which recorded a jump of 26 % since October 2006.

Polaris, up 47%, and Mphasis – BFL, up 58 % over the same time period, have put in similar performances, and now the focus is on Patni Computers (NYSE:PTI) to follow. Satyam Computer (SAY), up 4.5 % for the week, has also been the subject of continued speculation about a sale to a bigger player, but the management has rubbished all such talk.

Other stocks that could add to the upside on positive market action are Mahindra & Mahindra (trades as a GDR), which has been putting in some stellar moves on days of market strength. Keep a watch on Tata Motors (NYSE:TTM) as political tensions cool over its proposed new plant in West Bengal. In case of weakness in the markets,watch for a sell off in the FMCG (consumer goods) sector, mainly in ITC, Godrej and Hindustan Lever.

Jet Airways, highlighted in last week's column, was up 4.9 % and performed contra to crude oil's down week. Dr.Reddy's (NYSE:RDY), mentioned last week, continues to trend up steadily.The mid cap and small cap indices added to the cheer and the holiday mood and hold out promise of further strength in the week to come.

Have a happy, healthy and prosperous New Year !

Disclosure: Author hold positions in the above mentioned stocks on behalf of his clients in their investment portfolios.

Source: Indian Market Report: Looking Forward To 2007