India Market Weekahead – Time to “sell in May and go away”?

April 29, 2012

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

Markets were jolted this week by news that Standard & Poor’s cut India’s long-term rating outlook to negative from stable, citing slowing growth and a ballooning current account deficit. The negative outlook signals at least a one-in-three likelihood of the downgrade of India’s sovereign rating within the next 24 months.

The results season, as expected, didn’t have much impact on the market except for specific stocks. The IT sector results so far have been a mixed bag with Infosys which reported weaker-than-expected results while TCS, Mindtree and HCL Tech surprised the street.

TCS reported a healthy growth in both top line and bottom line in an environment where the prospects of the Indian IT sector were in question due to muted performance and guidance given by Infosys. Unlike Infosys, the TCS management indicated a revival in the industry demand scenario over the last one month. Moreover, the company is expecting FY13 to be a normal year of growth and also sounded positive on its hiring plans.

Wipro reported results which were in line with street estimates but it disappointed on the Q1 FY13 guidance front. Among the IT pack, we remain positive on TCS, Mindtree and HCL Tech. Infosys was the odd man in the pack. It seems it has lost the plot and may not continue to enjoy premium valuation going ahead.

Two key banks declared their results last week. ICICI Bank surprised with its net interest income (NII) and net profit growth ahead of estimates. Net interest margins (NIM) at 3.01 pct, up 30 bps, were its highest in the recent times. Axis Bank’s NII growth was inline with consensus expectations. However, driven by lower provisions, net profit at 12.8 bln rupees was ahead of consensus expectations. The revised ratio for the Enam merger is also in its favour. We are positive on Axis Bank.

Meanwhile, the rupee remained under pressure during the week and retreated to a three-month low closer to 53 rupees against the dollar. There was strong demand from importers and oil refiners which contributed to the negative rupee tone. Standard & Poor’s downgrading India’s credit rating also added to the woes. With further uncertainties surrounding the domestic and regional economic outlook, the rupee is likely to remain weak.

The rupee will be driven in the short run by FII flows, again uncertain with the GAAR issues still to be resolved. The subsidy bill continues to soar due to indecision on the petrol price hike.

The coming week is a truncated trading week as the stock market remains closed on May 1 on account of Maharashtra Day and Labour Day. Automobile and cement shares will be in focus as companies will start unveiling monthly sales volume data for April from Tuesday. Automobile data may seem muted compared to the last two months due to advance purchases in February and March. On the macro front, HSBC’s monthly purchasing managers’ index (PMI), which indicates the health of the manufacturing sector, is likely to be released. The HSBC manufacturing PMI eased to 54.7 in March from 56.6 the previous month.

In addition, investors will closely watch India Inc’s Q4 March 2012 results with focus on the guidance provided by the management to gauge the earnings outlook. Among the key results, we have some FMCG names like Godrej Consumer Products, P&G, Dabur, HUL, Marico and Gillette. Titan, Bank of India, Oriental Bank of Commerce, Hero MotoCorp, Bank of Baroda and Bharti Airtel are also unveiling their results.

Globally, the focus will be mainly on the European Central Bank’s monthly policy meeting on Thursday and the U.S. non-farm payrolls report on Friday. Ahead of the government’s payrolls report, investors will be watching the ADP Employment Report due on Wednesday and weekly jobless claims data due on Thursday for indications of whether the labour market is gaining momentum.

Broadly, in terms of market view, we expect investors would continue to tread cautiously amid persistent headwinds for the domestic economy and uncertainty over GAAR. FII flows turned weak in April after three months of strong inflows. They seem to be awaiting clarity on the tax issues before taking a fresh view.

In addition, the domestic economy continues to face various challenges in the form of sticky inflation, fiscal deficits, a weak currency, policy paralysis and dwindling investor sentiment. Thus, the macro-economic backdrop is not conducive for the equity markets at the moment with risk aversion still high.

The only “silver lining” is the markets holding to the support of 200 DMA despite the barrage of adverse news. In case we break these levels we could head towards 5000/5050. The upside seems to be capped at 5300 unless there is a convincing clarification on GAAR and some movement on the policy front.  Hence, the band could be as narrow as 5150/70 to 5280/5300 and this could tire out traders. It needs to be seen whether traders would adopt the old adage — “sell in May and go away”.

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Markets are in a limbo due to non participation by the FIIs. Parliament is in session to pass the budget. It will be range bound market with a negative bias in May.

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