Overseas cues to drive the market but limited upside

August 4, 2012

A positive week for the markets saw volatility in a narrow band with Nifty gaining about 115 points to close at 5216, a gain of about 2.25 pct. The midcaps and small caps outperformed the frontline stocks indicating retail interest.

FIIs continued with their buying spree lapping up about US$ 535 million worth of stocks. The new finance minister  Palaniappan Chidambaram was given a thumbs up but expectations of any radical move are low especially after the disappointment from Prime Minister Manmohan Singh in the last fortnight.

The Reserve Bank of India left the CRR and repo rates unchanged but reduced the SLR by 100 bps. The India Meteorological Department (IMD) hinted at a “drought-like” situation as drought can be defined only after the season ends. It is expected that rainfall across the country in August and September will be below normal. This too was taken in the stride by the markets as this situation was building up for a while.

As the industrial sector was coming to terms with the Manesar violence, which questioned India’s image of offering a business friendly environment, we had the worst power failure in post-independent India with the northern grid collapsing. It wasn’t limited to Monday and we saw a repeat on Tuesday, exposing the shoddy state of India’s infrastructure. Our industrial sector seems to be having a bad concoction of a non-performing government, labour uprising in the industrial environment and a failing infrastructure but we still grin and bear it.

The manufacturing PMI fell from 55 to 52.9, the biggest fall since September last year. Exports in June fell 5.45 pct but the saving grace was the larger-than-expected fall in imports by 13.46 pct which helped narrow the trade deficit to about $ 10.3 bln.

A broker monitors share prices at a brokerage firm in Mumbai August 9, 2011. REUTERS/Danish Siddiqui/Files

When hopes fade on the domestic front, market men are forced to look overseas for cues. The ECB kept the rates unchanged but hope from Fed hasn’t dimmed despite US job data of non-farm payrolls rising to 163,000 against an expectation of 95,000. The jobless rate increased to 8.3 pct, showing that more people are giving up their search for work. The Fed meeting on September 12/13 would be crucial for further easing and stimulus.

Spain signalled that it would consider seeking a sovereign bailout by responding to a conditional offer of intervention from ECB. This was another reason for the international markets to rally on Friday as borrowing costs in Italy and Spain fell. Most of the global markets closed the week on a positive note with gains of over 2 pct except Nikkei which was flat.

The quarterly results announced last week had a few surprises especially from the Pharmaceutical pack. Cipla and Dishman Pharma showed remarkable improvement and the stock price seems to have moved into a new range. On the other hand, consumer favourite Titan disappointed both on the topline as well as at the net level signalling the slowdown in the sector which had been expected for a while. Marico too disappointed confirming difficult days ahead for the FMCG sector.

Jet Airways, like SpiceJet, returned to profitability after five quarters. I believe this could be the best quarter for the aviation sector in the near future as the passenger load factor is highly elastic with the high fares already having a negative effect. Most of them have already reduced operational costs and that doesn’t leave room for further cuts. The only trigger for this sector would be FDI in aviation which is still uncertain.

Among the IT companies Satyam and Oracle came out with better-than-expected numbers but looking at the overall sentiment in the IT sector, the gains were limited.

NTPC rallied after Coal India’s agreement to supply 80 pct of the coal needed to fuel new power projects on directions from the PMO but Coal India corrected this as “80 pct or penalty clause”, which could affect its performance.

In another development, the Union cabinet approved a reserve price of 140 billion rupees for spectrum auction to the telecom companies (Telcos). This is about 22 pct lower than the regulators’ suggestion but still much higher than the demand of the Telcos who would now use this as a catalyst to raise tariffs.

After being bombarded with adversity in the last many months, it seems investors have started developing immunity to adverse news. This may support the markets by holding the bottom but the question many would ask is the length of this dark tunnel which keeps getting narrower – whether it will finally squeeze them out?

I am still of the opinion that the bottom of 5000 for the Nifty could hold for sometime but don’t see too many triggers for the markets to move much beyond current levels. A spike due to the strong FII buying or support from international cues would be a short term phenomenon. The markets need a huge dose of domestic policy action which cannot be substituted with international cues which would only play a supporting role. Looking at the current political mood, policy action seems remote. It’s important to have a view and logic to support the same. But more important is to have a strategy in place in case your view goes wrong as markets have a mind of their own and many a times – in the short run – no matter how well placed your logic is, the markets tend to surprise.

Any move beyond the current levels without any strong data/news flow would be an aberration and hence I would utilize a move beyond 5250/5300 to lighten my portfolio.

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