India markets weekahead: Moody’s rating, inflation to set the tone

November 13, 2011

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

The week that went by was quite a turbulent one as domestic and international factors dampened market sentiments, resulting in a 2.1 pct decline in Nifty in what was a truncated trading week. We were saved from a possible savage cut on Thursday as it was a market holiday.

The index of industrial production for September grew by 1.9 pct versus 3.6 pct the previous month, slightly below market expectations. Steep declines in the capital goods and mining segments dragged the IIP down. In addition, the trade deficit widened to a four-year high, increasing to $19.6 billion according to October data.

Moody’s downgraded the Indian banking sector outlook from ‘stable’ to ‘negative’ triggering investors to dump banking stocks. To add to woes, the 10-year benchmark bond yield approached 9 pct levels. Lower bond prices may result in MTM losses to the banks’ G-Sec portfolio. Consequently, key banking counters such SBI, ICICI Bank and Axis Bank saw a sharp sell-off bringing prices to attractive levels.

The rupee fell to a two-and-half-year low of 50.42 against the dollar on the back of weak industrial production data and a weak stock market. Risk appetite deteriorated as euro zone fears increased. Going forward, the trend in the rupee will continue to be influenced strongly by the trends in the risk appetite with very limited recovery in sight in the near term.

Yields on Italy’s 10-year bonds soared over 7.6 pct, the kind of level which forced Ireland, Portugal and Greece to seek an international bailout. A new emergency government headed by former European Commissioner Mario Monti is expected to be in place before the opening of financial markets on Monday.
Trading in the U.S. indices ended on an upbeat note on expectation of the above change in guard. With all this in the backdrop, Indian markets are poised for a positive opening on Monday. Nervousness would still persist on lack of concrete evidence regarding a true resolution to Europe’s debt woes and this could limit the upside.

Investors will keep a close tab on the wholesale price index (WPI) data for October which is due on Monday. Moody’s too is expected to review India’s rating which is currently Baa3 — the lowest investment-grade rating.

The Q2 earnings season is drawing to a close with select firms namely Coal India, Reliance Communications, LIC Housing Finance, BHEL, Cipla, M&M, Tata Motors, Oil India and Unitech among others set to announce numbers in the coming week.

As far as my view on the markets goes, a lot of negative news has been already discounted in the prices. In the current situation, the markets are likely to remain in a range till the time we see the economic environment picking up.

Domestically, this will happen once the interest rates start to come down which may be two quarters down the line. Inflation may be headed for a decline in the next two months due to base effect and a good monsoon. The markets still haven’t decisively broken the band and I expect a bounce back above 5200 levels in the coming week.

Investing in rate sensitive sectors could be a good bet at the moment looking at the price points. Also, buying infrastructure stocks could be a good contrarian bet if someone has 3+ years of investment horizon.

Nonetheless, it’s a good time to start building an equity portfolio, though in a staggered manner. Remember the famous quote – “be fearful when others are greedy and greedy when others are fearful”.

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