India Market Weekahead – Time to start buying

By Ambareesh Baliga
May 20, 2012

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

May is typically a bear month for the stock markets as players often look to take advantage of the adage, ‘sell in May and go away’. Before going on vacation, I was expecting the markets to correct to levels of 5000/5050 but was pleasantly surprised to see the crack leading to around 4800 levels. All the negative factors compounded over the past few weeks gave momentum to the ‘sell’ sentiment which remained jittery over the fate of Greece after an inconclusive election.

Weighing on sentiment is a growing sense among investors that the euro zone debt crisis is aggravating, further fuelled by fears of a Greek euro exit and the deteriorating health of the Spanish banking system. There will be fears surrounding any contagion effect if Greece did exit the European Union. Investors continued to reduce positions in riskier assets, leading to a fall in oil prices and a drop to a 4-month low for spot gold, while lifting the dollar which tends to be seen as a safe haven in times of heightened uncertainty.

Facebook Inc priced its initial public offering at $38 per share, giving the world’s No. 1 online social network a $104 billion valuation in the third largest offering in U.S. history. However, it disappointed investors with a tepid market debut on Friday. Shares rose a scant 0.6 percent — nowhere near expectations for double-digit gains on the first trading day.

Back home, the rupee remained under sustained selling pressure during the week and it reached record lows beyond 54.50 against the dollar. Weak risk appetite undermined capital inflows and internally the twin deficit concerns — fiscal and current account deficit — moderating growth prospects, soaring inflation numbers led to the rupee weakness. A falling rupee would increase the threat to inflation, limiting the RBI’s freedom to cut rates. The central bank did intervene which helped drag the currency off its worst levels. The rupee would continue to remain vulnerable in the short-term.

The State Bank of India (SBI) surprised the street with a higher than expected net profit growth in the fourth quarter of 40.5 bln rupees. Slippages came in lower than the previous quarters leading to a decline in NPA provisions made by the bank. Its net non-performing asset (NPA) ratio declined to 1.82 pct, while the gross NPA ratio fell from 4.61 pct to 4.44 pct during the same period. We are positive on the SBI and expect a gradual alleviation of the asset-quality concerns and a turn in the rate cycle to drive the stock performance going ahead. The recent correction is a great opportunity to acquire this stock.

Coming to the cues for the coming week, internationally, U.S economic data including April’s existing home sales is due on Tuesday with new homes sales figures on Wednesday. Initial jobless claims and durable goods orders will be published on Thursday while the consumer sentiment data is due on Friday.

While there are not many cues locally except for the next batch of March quarter results which include Tata Power, BHEL, ITC, Reliance Infrastructure, BPCL, PFC, Wockhardt, Voltas, Jet Airways, MOIL, Suzlon and Crompton Greaves. Investors will continue to track the developments in the euro zone.

PSU OMCs and auto stocks will be in focus on buzz that petrol and diesel prices will be increased soon after parliament’s budget session ends on Tuesday. Auto stocks have already been battered due to the tepid numbers, and could fall further. FMCG stocks may extend their gains as the weather department has forecast that the southwest Monsoon will arrive in time.

We could see a relief rally till 5000 levels as the indices are in deeply over the sold zone. However, any untoward development internationally will lead to Nifty breaking the current levels and seeking support around 4500/4520 levels where we expect value buying to emerge. Another adage “Don’t wait for the bottom to buy” — hence, start buying on the next correction to about 4750-4800 levels and top up in case we see levels of 4500/4520. All round pessimism indicates we are close to the bottom with most of the eventualities discounted to a large extent.

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