India Market Weekahead – Time to book partial profits

July 7, 2012

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

A stupendous rally towards the end of June was followed by consolidation in the first week of July. Though the benchmark Nifty index ranged in a narrow band of 60 points between 5270 and 5330, the broader market especially the mid-caps were in focus with some of them returning more than 20 pct during the week. After a long time we saw domestic investors returning to the equity markets albeit with a lower risk appetite.

We are yet to see the rollout of policy measures from New Delhi. Though the government in its efforts to revive investment sentiments began talking about controlling fiscal deficit, reviving the mutual funds and insurance sector, issued a draft for clarity on tax matters, reviewed a backlog of foreign investment proposals — but policy announcements are expected after the presidential elections on July 19.

The market, which has already moved up sharply based on expectations, is in a mood to wait and watch till the rollout. Meanwhile, the monsoon which is crucial for the agricultural sector has been playing truant with the deficit as high as 29 pct in June compared to the long period average. There are hopes that the monsoon would be normal in July, thus the damage would be minimal. The next two weeks would be crucial both for the policy rollout as well as the progress of the monsoon.

The rupee appreciated strongly to 54.30 earlier in the week based on expected demand for the FII debt auction but sank back to 55.40 after a lukewarm response to the SEBI auction of permits.

Oil prices also bounced back during the week after Iran threatened to stop oil tankers from shipping crude through the Strait of Hormuz to countries supporting sanctions against it but corrected after weak U.S. employment data. I expect Nymex to settle around $80 and Brent around $92 in the next few weeks.

We are yet to benefit from lower oil prices though gold imports as well as other non-oil imports have seen a downtick in the last few months. We seem to be in a ‘chicken & egg’ situation with international investors unwilling to pump in due to the overall health of the economy but also specifically the current account deficit. The deficit could have improved had the rupee appreciated (in light of lower oil prices) and further flow of investments would have taken it to respectable levels. We need to see which would happen first — rupee appreciation or flow of foreign investments as both would depend to a large extent on policy measures by the government.

Europe and Britain loosened their monetary policy as expected but China surprised by its sudden move. Though there was an expectation that there could be more unorthodox measures and a hint at long-term refinancing operations (LTRO) 3 or resumption of Securities Markets Program (SMP) bond buying, the disappointment seems to have been taken in the stride. The focus this week would be on the minutes of the latest Federal Reserve Policy meeting.

China will unveil data on second quarter gross domestic product for June as also data on fixed-asset investment, inflation, industrial production and bank lending this week. This will give important clues about the health of the world’s second-biggest economy. Economists expect China to report year-on-year GDP growth of 7.6 pct, compared to an 8.1 pct yearly gain in the first quarter.

Auto sales in India disappointed as expected but cement continued to surprise, thanks to the delayed monsoon.

Kingfisher was in the news for the wrong reasons after reports of lenders planning to sell company assets to recover dues — though denied by the company. It seems to be in its last lap unless the promoters pump in fresh equity.

Again I don’t expect them to throw good money after bad unless they have a “white knight” at the other end who could come in subject to the announcement of FDI in aviation. There seem to be too many moving parts and it would be interesting to watch that space closely.

The forthcoming week would flag off the first quarter results of India Inc with IT heavyweight Infosys and TCS announcing their results on July 12. It is again expected that Infosys would miss guidance and confirm a slowdown in the sector. The others would be HDFC, HDFC Bank and IndusInd Bank. The silver lining for this results season is that expectation levels are low and hence any positive surprises could act as a trigger for the specific stock or sector.

The government will announce data on index of industrial production (IIP) for May on Thursday while data on June WPI will be out on Friday.

The markets would be in a consolidation mode awaiting news on monsoon and policy measures. It will need a good dose of positive news to cross the 5350/5400 barrier. The strategy at this point would be to book partial profits and await concrete action before reinvesting. If the government acts per our expectation and the monsoon spreads well in the next fortnight, we may get into a new zone of 5400+ in the coming weeks. But remember an old phrase “slip between the cup and the lip” and hence keep some cash aside for that possible slip.

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