Markets to hunt for direction

July 16, 2011

(The views expressed in this column are the author’s own and do not represent those of Reuters)

Markets last week saw profit booking after a spirited run-up. The cabinet reshuffle was a damp squib and the Mumbai triple blasts did not have any impact on the markets. Lower IIP and higher inflation continue to dampen sentiments. International cues like S&P’s likely downgrade of U.S. sovereign rating and EU stress tests on banks added to the pressure.

However, the Nifty managed to end only marginally lower, thanks to TCS guidance which gave a fillip. Among the IT pack, participants have expectations only from HCL Tech, which has surprised on the positive in the last few quarters. We believe that the issues of undercutting by clients, wage revisions, visa issues, under utilisations, etc would continue to haunt IT players in the foreseeable future. Hence, we anticipate an underperformance from this sector in the near future.

Policy to share profits with tribes has taken away the charm out of mining and metal players for the time being. However, the sector got support from the short-term rally on the LME due to a weaker dollar. The commodity run could halt at this point and we expect that metals and mining players would again take a beating in the days to come.

Going forward, it would offer some value investing opportunities in the likes of Coal India, MOIL and NMDC.

Sugar quota has been released for exports but would not be able to compensate the opportunity loss of Indian millers in the international market. The deregulation in the sector is long awaited. India would end the current year with a decent surplus on sugar stock (more than 3 million tons) and is unlikely that sugar scrips would see any sustainable rally though they may give trading opportunities based on news flow.

The performance of tyre companies has improved recently. Apart from the improvement in business, some of the companies seem to be in news due to sale of their land bank. The halt in rubber prices would help in kicking their margins higher. We are positive on the sector and are looking for even some beaten down scrips like CEAT to add up in portfolio for some opportunistic gains.

Rains for July have already been forecast lower, however the coverage till now has been satisfactory, except for a few regions. While the automobile sector has already started facing pressure due to dwindling sales, interest and raw material cost, any negative monsoon cues would take the shine from this sector along with others like FMCG and consumer goods.

HDFC Bank, Kotak Mahindra Bank and Axis Bank would unveil their Q1 FY12 earning figures next week, which would provide some volatility in the sector. Upcoming results would be watched cautiously and we do not expect any firecrackers this time. Look ahead for range- bound trading sessions with an eye on the RBI’s policy review on July 26.

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