India Markets Weekahead: Tough week seen after U.S. rating downgrade

August 6, 2011

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

The week that started on a positive note after the U.S. agreed to raise the debt ceiling had to soon face the heat of global market turmoil. Fears of double-dip recession and worsening European sovereign debt woes dragged Indian equities lower to a 14-month low and a cut of 5 percent for the week.

Fears of U.S. recession and the spreading euro zone crisis wiped $2.5 trillion off world stocks this week. The crisis seems to have deepened after the ECB refrained from hiking rates.

Indian equities witnessed broad-based selling with rate-sensitive sectors witnessing a deep cut after successive rate hikes by the RBI. The automobile sector had its share of woes as the government may look at charging higher prices for diesel sold to luxury cars and commercial users.

For the coming week, Indian equities have enough data points both globally and on the domestic front for determining market direction. To begin with, markets will initially react to the U.S. rating downgrade that came in after the U.S. markets closed on Friday.

On Tuesday, markets will keenly watch out for the U.S. Federal Reserve’s one-day policy meeting where speculations are growing that the Fed is expected to announce QE3.

Back home, the government will announce industrial output data for June on Friday. It is expected to rise 5.8 percent y-o-y in June as against 5.6 percent in May.

The June quarter results season is coming to an end with cost pressure on account of rising interest rates clearly visible. Some of the prominent results coming out during the week are M&M, Mahindra Satyam, Tata Motors, Tata Steel, Coal India and SBI.

The markets are at a crucial juncture with the Nifty likely to test 4800 Р5000 levels. Although the Indian economy is better placed compared to peers, the sentiment factor will play through and we could have a sense of capitulation.

Commodity prices, especially oil, are expected to correct and the rupee to strengthen. It is also expected that post these developments, the RBI may halt the rate hike cycle in the September policy which should be a positive trigger for the markets.

The only weak link which could derail the economy is the political scenario — the government’s policy decision making and the reforms process. If this falls in place in the next couple of months, we could have an economy which could be a favoured investment destination when the world economy is faltering. International investors will pay a premium for relative growth.

Mid-cap stocks may continue to see selling pressure and hence it is advisable to refrain from entering this section till the dust settles. Mid-cap companies where promoters have pledged a significant portion of their holding will be on the bears’ hit list in case promoters face liquidity crisis.

It’s time to pick up blue chips, which would be available at attractive levels due to all round selling. All in all, it will be a tough week for the markets but a great hunting ground for long-term investors.

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