India Markets Weekahead: Crucial levels may hold, don’t rush in yet

February 26, 2012

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

After seven weeks of positive close, markets finally showed first signs of fatigue and the Nifty fell by 2 pct over the last week. High crude oil prices dented investor sentiments as Brent touched $125 a barrel, the highest since last April, on fears of worsening tensions between Iran and the West.

Buying continued by foreign institutional investors (FIIs) throughout the week and it was in fact intense selling by domestic institutional investors that dragged the markets down.

MCX, the first public issue this year, turned out to be one of the best received offers of recent times with the issue being over subscribed by more than 54 times. This offer was seen as a key test of investor appetite for primary market after weak markets forced many companies to shelve stock offerings last year. This should call for an attention from the government so that it can push through some share divestments it was looking for but at decent valuations unlike NHPCs, PTC Financial and Satluj.

Meanwhile, globally, euro zone reached an agreement to hand Greece euro130 billion (US$170 billion) in additional bailout loans to save it from a potentially disastrous default next month. Without the deal, Greece was facing a potential default next month and possibly being forced out from the euro zone. The deal was mostly discounted by the markets and thus we didn’t see any sharp reactions to it.

Our view is that the Greek problem for the euro zone seems to have been sorted out to an extent that the euro zone leaders have got more time on hand to “ring fence” Greece whenever the inevitable collapse happens.  But for Greece there may not be any long-term solution and it’s only moving towards a collapse, albeit slowly.

With quarterly earnings season over, budget expectations are expected to keep markets volatile. Meanwhile, polling for assembly elections in five states concludes in early March 2012 with results due on 6th March. This is another important indicator that markets will look out for in the coming weeks.

Shares of automobile and cement companies will be in focus in the near-term as companies from these two sectors start unveiling monthly sales volume data for February 2012 from Thursday. HSBC’s manufacturing purchasing managers’ index (PMI), which indicates the health of the manufacturing sector, will be out on Thursday.

The hike in petro products retail prices post the elections may give a final sentimental spike to the oil marketing companies which have outperformed. With crude on the boil, the subsidies are bound to rise and so are the losses.

On the global front, economic data due next week in the U.S. includes durable goods orders on Tuesday and revised fourth-quarter GDP on Wednesday. Weekly jobless claims and ISM manufacturing data will be released on Thursday.

Domestic market sentiments have improved considerably, but valuations are not attractive anymore and further gains from hereon would require drastic policy actions from the government. High crude oil prices remains a concerns as oil import bill has already surged over 40 pct for the nine-months ended December, widening an already huge current account deficit. The FII inflow has been supporting the rupee which otherwise would have again turned weak.

Sterlite and Sesa Goa may see action on Monday to adjust to the exchange ratio which is tilted towards Sterlite shareholders. Although it would be the third largest profitable listed entity, the question would be whether the investors will give a premium to the group which has always been looked at as investor unfriendly. The earlier proposed restructuring was shelved in 2008 after investor opposition.

Strong support exists at 5400 levels for the Nifty which if broken could lead it to 5200/5225 levels which is also its 200-day moving average. This level could see buying creeping in from those who may have missed this rally.

Also, FII flows continue to remain positive which gives us some hope that the crucial levels may hold, though I will not be surprised to see levels closer to 5000. One can start deploying cash at these pivotal levels as it may be safe of assume that 2012 should see a new bull market rally.

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