India Market Weekahead – Brace for lows

By Ambareesh Baliga
June 3, 2012

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

Equities reacted sharply due to continued concerns over the euro zone crisis and particularly Gross Domestic Product (GDP) growth numbers which were much below the most pessimistic forecast. Minor relief in the form of favourable opinion polls in Greece along with expectations for a policy stimulus in China to support growth failed to provide the necessary impetus to take the Nifty beyond the 5000 mark on a sustainable basis.

GDP grew by 5.3 percent in the Q4 quarter (January-March) — the slowest growth since March 2003. Though one may contend that a 5.3 percent growth seems plausible, as several developed economies are expected to grow by 1-3 percent, yet for an economy plagued by a host of problems ranging from persistently high inflation, a plummeting rupee, alarmingly high fiscal & current account deficit and policy paralysis due to a weak government, the current GDP numbers seemed to be last nail in the coffin. The only redeeming feature has been oil prices which have consistently been falling.

All eyes are now on the RBI monetary policy review on June 18. Once again the RBI is walking a tightrope and probably the focus would be on growth. However, the RBI does not have room to ease monetary policy aggressively and will have to approach any further easing with caution. With policy paralysis not likely to ease any time soon, India may have to settle for sub-par growth and elevated inflation.

Internationally, the noise of Greece exiting the Euro is getting louder. Fear of contagion spreading to other peripheral economies remains a key concern. To overcome these fears, there is a high probability that after the June 17 Greece elections, a massive euro rescue package may be likely from Germany and the European Central Bank. This could lead to a temporary bounceback in the equity markets but any such rescue packages are just means of delaying the inevitable.

The rupee extended its fall beyond 56.50 a dollar before a recovery as risk aversion deepened. Given the situation of sticky inflation, lack of reform facilitating FDI and portfolio investments and intensifying worries about the euro zone, the rupee is likely to remain weak in the near term.

As expected, automakers posted largely muted sales in the month of May. Maruti disappointed, with its petrol car volumes witnessing a sharp fall. The total sales fell 5 pct year-on-year, below the 100,000 unit mark. Tata Motors also reported weak May sales. While TVS Motor reported a fall in two-wheeler demand, Hero Motors reported a 11 pct growth in May.

For June, three events will largely determine market direction, namely Greek elections, the RBI’s mid-quarter review and progress of the monsoon. Any unpleasant developments on these fronts are likely to push the markets lower.

In sector specific action, shares of exporters will be in focus as the Commerce Minister unveils foreign trade policy on Tuesday. U.S. and Europe account for about a third of country’s total shipments. Infrastructure and cement stocks will be in focus after the Prime Minister approved the setting up of a mechanism that will track the progress of major infrastructure projects to avoid delays in their completion. However, going by the track record, this could only remain an intent. Oil marketing companies may remain in action as petrol prices has been cut by 2 rupees and there may not be any change in diesel/LPG prices due to the correction in oil prices looking at the fragile political scenario and the logical excuse of falling international oil prices.

Internationally, a dismal U.S. jobs report added to fears that Europe’s spiralling debt crisis was dragging down the world economy. The Fed’s next policy meeting is on June 19-20. Expectation of further quantitative easing, or QE3 are becoming louder.

For the coming week, the Nifty is expected to re-test its recent low of 4780 on the back of weak cues internationally and no support back home. Needless to say, we are close to hitting December 2011 lows once again as there seems to be no positive lever that can pull the markets out of the current pessimism. As suggested last week, those with short to medium term outlook should wait for the time being. Long term investors could take a plunge on any signs of panic.

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