Hopes fade as investors await concrete action
(The views expressed in this column are the author’s own and do not represent those of Reuters)
It was an action-packed week for the markets but not for the reasons we had anticipated. Manmohan Singh’s government, which was expected to announce a string of policy action steps starting with a diesel price hike, failed to make any announcements which would have cheered markets.
Instead, it got busy firefighting to pacify the NCP, a sulking ally which was threatening to move out. As feared, policy paralysis along with other international worries on the euro zone and the monsoon deficit resulted in a breakdown from support levels. After touching a low of 5034, Nifty closed the week at 5100 — a loss of about 2 pct.
Buying peace with the NCP seems to be at the price of policy reforms. The UPA has decided to set up a co-ordination committee to screen the proposed policy actions before presenting it to the cabinet. A number of proposed reforms could be a casualty as a result of this committee and those which go through could get delayed beyond expectation. Hence, we would be slipping back into hibernation. But then, when did we ever move out of it? It was just hope.
Monsoon rains continued to bother the markets and have failed to pick up. We still have about 20 pct deficit to the long-term average for the week ending July 25. Deficient rains in areas of west and north India would result in lower production of oil seeds, coarse pulses and sugarcane. It may not have a spiralling effect on food inflation, thanks to the bumper crop last year, but still the situation is worrisome. A government panel is expected to meet this week to take stock of the drought-like situation in various states.
World markets reacted positively to ECB President Mario Draghi’s assurance that he would take appropriate steps to protect the euro zone from falling apart. One should hope that this is not a mere statement but would be followed by action. This also helped the rupee to bounce back from lower levels to close at 55.24 versus the dollar, almost flat for the week. It is also expected that the ECB chief will discuss with German Bundesbank President Jens Weidmann the lowering of interest rates and increased bond buying, among other initiatives. This should act as a cushion for a while.
Market regulator SEBI hiked liquidity levels for F&O eligibility which resulted in about 51 scrips being removed from the list. Subsequent unwinding resulted in a number of them losing heavily thus exerting further pressure on markets. The lone exception was MTNL where there was short covering which saw the stock at a 3-month high of 30 rupees. The SEBI move also seemed to have resulted in margin calls for highly leveraged mid-cap stocks, some of them showing sharp cuts such as Pipavav Defence, Tulip Telecom, Parsvnath Developers, Everonn Education and Glodyne Technologies. High promoter pledges are like the Damocles sword but being active stocks they are speculators’ favourites.
The week was high on financial results which turned out to be a mixed bag. Raymonds, LIC Housing Finance, Ashok Leyland, Crompton Greaves, Jindal Steel & Power disappointed whereas Hindustan Unilever, ITC, ICICI Bank, Larsen & Toubro surprised on the positive side. Hindustan Unilever was a big surprise with a stunning show, resulting in the stock touching a lifetime high of 478 rupees before closing the week at 465 rupees. It’s time to exercise caution in the FMCG pack as they would be affected due to deficient monsoons and the current valuation doesn’t leave any room for disappointment.
Reliance Communications’ decision to put Flag Telecom IPO on hold pushed the stock to its lifetime low of 53 rupees. An investigation by the CBI indicating payoffs to the Maran family in the Aircel-Maxis deal resulted in two of their listed stocks — SpiceJet and Sun TV — losing about 15 billion rupees in market cap on Friday.
The Reserve Bank of India is expected to maintain status quo on July 31 when it announces its first quarter review. Continued inaction from the government and the fear of a drought-like situation would prompt the governor to maintain a hawkish stance. The Fed and ECB monetary policy meet next week and U.S. unemployment data for June, slated to be out on Friday, could be the international news flows to be watched.
The next few days will see the earnings season coming to a close with some important results such as Cipla, Jaiprakash Associates, GAIL and Bank of Baroda. The cement and auto dispatch numbers will be known mid-week which could have a negative effect on respective sectors as a slowdown is noticeable.
The Nifty seems to be having a support at 5000/5020 levels which may not be breached unless the world markets correct sharply. A move beyond 5200 seems difficult without concrete policy action which as of now seems remote, though not impossible.
The current state of affairs reminds me of Abraham Lincoln’s quote — “You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.”
We had seen the markets moving up sharply in the last 7-8 weeks based on the intent indicated by the UPA government. Presidential elections were to have flagged off the string of announcements and the failure to do so was the last straw. Going ahead, we do not expect investors to be swayed by the “intent” but act only on policy announcement. The big question is when? Till then, it is best to stay out and watch as all of us wouldn’t like to be fooled again.