Expert Zone

Straight from the Specialists

India Market Weekahead: Use opportunity to partially book profits

By Ambareesh Baliga
February 5, 2012

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

Markets surged over 2 pct during the week and are up 14 pct YTD driven by liquidity inflows from foreign investors, a CRR cut by the RBI, hopes of interest rate cuts in coming months, positive economic data and the government’s intention to kick-start the process on the policy front. The rally was unaffected by the court verdict on the 2G scam and the indices resumed an upward march.

The sustained strength and the rally in the markets seems to be feeding on itself — with liquidity chasing returns and markets delivering returns due to liquidity. There is also a lot of liquidity waiting on the sidelines and that could trigger the last leg of the rally.

The Supreme Court’s decision to cancel 122 2G licences issued from 2008 onwards is seen overall as positive for older players in the telecom sector, as only serious contenders are expected to participate in the rebidding process, thus triggering consolidation in the sector. Bharti has been the key beneficiary as none of its licences have been cancelled. Operators like Uninor, MTS, S-Tel, Etisalat and Loop could be the worst affected followed by Idea, DoCoMo and Reliance.

Firmer risk appetite underpinned further strength in the rupee which hit a fresh 3-month high at 48.68 against the dollar, taking gains to 9 pct so far this year after a 19 pct fall in 2011.

For the coming week, focus is likely to remain on third-quarter earnings. Hindustan Unilever, Mahindra & Mahindra, Bharti Airtel, ONGC, Power Grid, Tata Steel, Hindalco, ACC, Ambuja Cements, HPCL, Tata Power, BPCL, Britannia, Sun TV and JSW Steel are some key companies declaring December quarter results. On the macro front, industrial production data is due on February 10. On the political front, seven-phase polling for assembly elections in Uttar Pradesh begins on Wednesday.

And globally, the outcome of ongoing negotiations between Greece and the IMF for landmark debt deals will be keenly watched. Also, we have the ECB interest rate decision on Thursday. Meanwhile, U.S. employment data indicated jobs grew at the fastest pace in nine months in January and the unemployment rate unexpectedly dropped to a near three-year low — all suggesting U.S. recovery is on track.

However, we think that better jobs data would delay a potential Fed QE3. The simmering tension in the Middle East involving Iran and Israel could spring a nasty surprise for world markets.

Meanwhile, the trial court’s ruling on the then Finance Minister P. Chidambaram’s involvement in the 2G scam has come as a huge relief for the UPA government at least for the time being as Subramanian Swamy’s petition against Chidambaram has been dismissed. Though the order will be challenged and referred to the High Court, the markets will remain on track for now.

Markets are expected to open higher on Monday. The Nifty has broken the crucial resistance of 5200 convincingly and with the kind of foreign inflows we are seeing, this rally can continue a while longer. With most Q3 results coming either in line or better than expectations, earlier concerns of a bad quarter and risks of further earnings downgrades are behind us. The next big trigger for the markets in the coming days will be the elections and the Union Budget which is still some time away.

We could see levels of 5400/5450 in the coming days but would advise against fresh investment. Though we believe the bear market is over and this could be the beginning of a bull phase, the rally has been too sharp to sustain much longer. A healthy market is never a one-way street where the participation is low. We had expected a correction from 5100/5200 levels but this swing from over-sold markets to over-bought markets has the ability to deceive for some more time. Given a choice whether to blindly flow with the tide or to utilise the opportunity to partially book profits, I would choose the latter.

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