India Market Weekahead: Investor confidence, patience to be tested

November 27, 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 which witnessed the Nifty plummet to a 2-year closing low on concerns of slowing growth, weak corporate earnings and a faltering rupee. Fears of a global economic slowdown continued to weigh on Indian stocks.

With increasing dollar demand in India as foreign investors withdrew from the country, the Indian rupee witnessed a sharp slide this week. At 52.76, the rupee plunged to record lows as fears of an unstable euro zone and a gloomy global economy persisted.

The rupee continues to hover around record low levels and hence sharp volatility can be expected in the coming days. The depreciating rupee also adds to the woes of FIIs whose losses have topped up another 20 pct in the last three months. Closer home, a depreciating rupee will only aggravate inflation, play havoc on the deficit and affect corporate performance.

Internationally, apart from Fitch’s downgrade of Portugal, sentiments were also hit after German Chancellor Merkel negated expectations of introducing joint Euro bonds and ruled out any broadening of ECB’s role as a last resort lender. This has resulted in continued pressure on bond yields to move higher. Wary of dwindling market confidence in euro zone debt, euro zone member states are considering dropping private sector participation in the region’s permanent bailout fund due in 2013. This move if implemented would lead to undermining market confidence in euro zone sovereign bonds.

Also, the failure of a U.S. super committee to reach a deal on debt restructuring has led to fresh fears of a rating downgrade. This move could in turn trigger another major round of selling of emerging market and so called risky assets.

As the winter session of parliament commenced last week, the focus has shifted sharply towards the pending reforms waiting to be tabled. The falling rupee, combined with slowing growth, has added to a sense of urgency for a scandal-tainted government to push reforms to encourage investment. The cabinet has already approved 51 pct FDI in retail which may benefit many retailers such as Pantaloons, Trent, etc. but now parliament passing this bill is crucial. I believe this move by the government would benefit the retail and consumer sector.

Most of the retail sector promoters had built up their companies for this day when they could place their holdings with international majors at a hefty premium. It would also give a boost to the logistics sector. The next FDI announcement could be for the airlines sector allowing foreign airlines to invest. The much awaited Companies Bill also got the green signal from the Centre. This bill is likely to see the light of day in the winter session of parliament itself if the logjam ends.

FIIs have turned net sellers in India for 2011. With ongoing pessimism, Nifty could see a major cut if we break the current support of 4700 levels decisively. Alternatively, we could see a small bounce and hold above 4700/4750 levels. Either way, for a general investor, I would still suggest it’s time to wait and watch. Though it’s a great time to buy if one doesn’t need money in the next few months and is confident of the stocks one is buying. Technical factors could see the best of the stocks crack but that’s when confidence and patience will be tested.

Strong fundamentals have helped the Indian economy to minimise the impact of the earlier crisis and this would be instrumental in the future as well. Although I am bullish on the India story from a long-term perspective, India has lost its momentum partly due to overseas headwinds but mostly owing to the government’s ineffectual handling of the situation. It is thus important to adopt integrated efforts towards further strengthening the fundamentals of the economy by focusing on reforms.

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