India Market Weekahead – PM’s call for “animal spirit” gets the bull raging

June 30, 2012

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

The last trading day of June brought back memories of a raging bull market with a single-day gain of over 2.5 pct while the month ended with a 6 pct gain. On taking over the finance portfolio, Manmohan Singh along with his ‘dream team’ seems determined to revive both domestic as well as institutional sentiment. It started off by mending announcements made by his predecessor, especially the general anti-avoidance rules (GAAR) which kept foreign investors away in the last few months.

The call for revival of the “animal spirit” in the economy coupled with positive sound bites from the Euro summit helped the rupee bounce back sharply to 55.60 from record lows of 57+. It seemed that he has been able to stall the vicious cycle temporarily but whether he turns it around will depend on the flow of policy action over the next few weeks.

The new draft guidelines on GAAR cheered the markets. It has suggested that the tax evasion rules would not apply retrospectively and clarified that only income accruing after April 1, 2013 will be subject to the provisions of the GAAR and will be triggered only above a certain income threshold. Softness on the Vodafone tax issue has also lifted corporate sentiment. This helped revive the FII sentiment with fresh upgrades from foreign brokerage houses such as Deutsche Bank, Morgan Stanley, BNP Paribas and JP Morgan.

Internationally, euro zone debt worries eased after European leaders unexpectedly announced measures designed to alleviate the worst of the current debt crisis gripping the euro zone. The measures will help stabilise immediate sentiment surrounding the euro zone and lessen the sense of panic. We still hold the view that the inevitable has been deferred by a few months. However, oil prices bounced back sharply by 7 pct and this could negate the currency appreciation we saw on Friday.

We step into the new derivative contract with a sense of optimism and hopes of further measures by the government to revive the investor sentiment. Apart from this, among other cues, the manufacturing Managers’ Index (PMI) for June will be released on Monday. The HSBC manufacturing Purchasing Managers’ Index (PMI), compiled by Markit, slipped marginally to 54.8 in May from 54.9 in April. The services purchasing managers’ index for June is also expected to be out next week.

Auto and cement stocks will be in focus as companies from these two sectors start unveiling monthly sales volume data. We believe the auto dealers are holding a huge inventory which has forced auto majors to cut production. The monthly numbers are bound to disappoint. The cement sector bounced back in spite of the CCI penalty. There is an expectation of further consolidation in this sector but the valuations are still expensive.

Corporate India will start reporting earnings for the June quarter in a fortnight which could be a damp squib.  IT companies will be the first to report their June 2012 quarter performance. Most IT companies may not get the full benefit of the rupee depreciation due to the hedged positions. In addition, we see the billing pressure continuing for a few quarters more. Meanwhile, concerns on the monsoon front remain as we have not had a good start this year. For the first four weeks of June, rainfall was lower by 23 pct relative to last year but with bullish sentiment prevailing in the market, there are hopes of better rainfall in July.

On the global data front, the Bank of England and the ECB interest rate decision is due on Thursday while the U.S. employment report will be out on Friday. A slew of Chinese data is also awaited in the coming week but given the Chinese track record, one needs to see how much weightage the market gives to this data flow.

As elaborated in last week’s column, the ‘do-or-die’ situation is forcing the government to act and the markets are waiting further announcements. As expected, Nifty rallied to close 5300 levels.

Considering the current optimism and expected flow of policy measures, we could see levels of 5500-5600 in the July series. However, the gains could reverse if after the initial hype, the government fails to push through the intent. So keep your ears close to the ground for any signs of inertia in New Delhi.

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