India Markets Weekahead: Time to build a long-term portfolio

December 25, 2011

After a huge selloff last week, markets took a breather during the week gone by and managed some gains as investors resorted to bargain hunting along with short covering by bears. Easing of food inflation to 1.81 percent aided sentiments.

Moody’s upgrade of the government’s rupee-denominated debt ratings from Ba1 to Baa3 was another key event during the week. But I wonder how an upgrade can happen at a time when all levers of the economy are witnessing a deceleration? The fiscal deficit is in dire straits, with industrial production falling and a weakening of rupee should have been a case of concern. The only silver lining is the inflation which has improved more due to the base effect and that was expected.  Technically, no government can default on its local currency as it can print more notes to repay lenders and thus the rupee-denominated ratings should have been higher than foreign currency ratings. Thus Moody’s seem to be correcting this abnormality. Hence, the realignment of ratings is not really a cause for celebration.

Capital goods sector finally has a reason to cheer after a long time. Last week, ABB bagged a 4,000-crore rupee order from Power Grid Corporation (PGC). It has been a long time since the sector has received such a huge order. L&T early this week said it bagged new orders valued at 1,000 crore rupees across various business segments in Q3 December 2011. Valuation of some of the capital goods stocks are currently below March 2009 levels.

The coming week has some key events both on the domestic and international fronts. On the local front, weekly inflation data will be announced on Thursday. Automobile and cement stocks will be in focus as production and sales data for December 2011 will start trickling in from early next month.

Focus will also be on the outcome of the winter session of parliament, which has been extended till December 29 to discuss the Lokpal Bill. Besides the Lokpal bill, the whistleblower bill and judicial accountability bill will also be discussed in the extended session. One also needs to track Anna Hazare’s fast and the consequences, if any.

On the international front, the absence of European sovereign bond auctions for the next two weeks could lend support to stocks and the spotlight is likely to be taken away from Europe for a while. In the U.S., next week’s data includes the S&P 500 Case-Shiller House Price Index and consumer confidence data on Tuesday. The Chicago Purchasing Managers Index and pending home sales data are due on Thursday. After a strong gain in November, the Chicago index is seen giving back a modest amount in December.

What happens next week is important as it sets the tone for the coming year. From expecting a “Santa Claus rally” early in the month, the mood had shifted to being neutral/weak until the last week’s surprise rally. With the holiday mood setting in, many investors may not trade aggressively until the start of 2012 and thus the trading volume is expected to be light, increasing the volatility in the F&O expiry week.

Indian markets are trading near their March 2009 valuations and the Sensex P/E is trading below its long-term average which is unusual to sustain. However, in the current economic scenario, investors have started speculating about the repeat of the doomsday scenario of 2008.

The fear of a massive selloff is overdone and the downside in the Nifty will be restricted to 4,200-4,400 in the worst case scenario. Serious investors should not panic and use the opportunity to build a long-term portfolio. While the markets has been pricing a lot of those concerns, many of the headwinds which have been troubling our markets i.e. inflation and interest rates are likely peaking now.

Markets can remain weary for longer than expected in the same manner as it tends to remain over exuberant in times of optimism. I believe, in times like these, all the stakeholders of the economy, the government, the opposition as well as corporate leaders, would display the ‘survival instinct’ to get the economy back on track.

So hang in there and wait for sanity to return.

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Hindustan Markets are trading near their March 2009 valuations and the Sensex P/E is trading below its long-term average which is unusual to sustain.

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