Temporary market correction an opportunity to buy

By Ambareesh Baliga
October 7, 2012

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

Opposition party protests against the UPA coalition government’s economic reforms could not puncture market sentiment in the past four weeks. One domestic brokerage house dealer’s “fat finger” did it in just a few seconds.

Friday’s flash crash at the National Stock Exchange made some people doubt the exchange platform’s stability and the Indian stock market, which was brought to its knees within a few seconds with a 6.5 billion rupee selling order across 59 stocks.

The mood was buoyant earlier on Friday after fresh reforms announced the previous day, and I thought the Nifty was firmly on its way to 5,850/5,900 – until all hell broke loose.

Though the markets tried to recover after the crash, sentiment was spoiled. It was not a question of our economic stability, but the exchange platform stability which occupied the minds of traders.

A number of traders lost their long positions as stop-losses were triggered. Those who were waiting to sell at higher levels lost their nerve when the markets reopened for trading. And those who were waiting to buy at lower levels thought it would be wise to wait a while longer to see how the drama unfolded.

Friday also saw the new political group formed by Arvind Kejriwal alleging that real estate major DLF unduly favoured Congress chief Sonia Gandhi’s son-in-law Robert Vadra in business deals. Although the allegation may not have an immediate effect on the markets, it could exert pressure on DLF stocks.

Despite the flash crash, Nifty closed up 0.76 percent, a straight fifth week of gains. FIIs continued buying with a net purchase of $1.17 billion whereas domestic funds were sellers to the extent of $410 million. Global markets too closed on a positive note except the Nikkei, which fell by 0.08 percent.

Europe’s worries continued with Moody’s and the Basel Committee raising questions on the assumptions made by the independent auditor for Spain’s stress test. Greece’s report card is also expected, and that could add to problems when euro zone finance ministers meet on Monday.

Closer home, HSBC’s services PMI for September moved up to 55.8, but inflation remained in double digits at 10.03 percent. Also, ADB and IMF cut India’s growth forecast to 5.6 percent and 6 percent. But with all the reforms, investors took this in stride.

Oil is still in a correction mode, and the rupee continues to strengthen, with analysts expecting a sub-50 level next month.

Carlyle offloaded its entire holding in HDFC, which closed down 3 percent for the week at 750 rupees.

Reliance Industries has been demanding a 200 percent increase in the KG-D6 gas prices from April 2014, which would result in a gas price of slightly under $13. Although this demand may not be met, even a 100 percent increase to about $8 would be a big booster for the company, which has been sputtering because of low gas production.

RIL is exerting pressure for an early decision by issuing a veiled threat to not commit funds without clarity on revenue. The government would be forced to act because in a power-deficient country like India, idle power plants would become prospective NPAs. A number of other projects, especially involving fertilizers, are already affected because of a lack of gas supply.

Kingfisher’s woes continued this week, and there is a possibility of the lockout extending to a shutdown, which could throw Vijay Mallya’s group stocks into a tailspin as the much-talked-about stake sale in United Spirits was meant to resurrect the airline.

If the objective is lost, will Mallya go ahead and sell his prized jewel in desperation?

The second-quarter fiscal 2013 financial results season will kick off next week with HDFC Bank and Infosys releasing their results on Oct. 12. Infosys will have to surprise the markets to sustain the recent rally. IIP data for August will be announced the same day.

The momentum built up in the last five weeks may have hit a bump, but it hasn’t reversed. The temporary correction is an opportunity to buy as technical glitches can’t outweigh the paradigm shift in policy making we have witnessed in the recent past.

The gush of international liquidity, strengthening rupee and lower commodity prices supported by an investment-friendly government is a heady concoction for the markets.

I don’t see the Nifty breaking 5,700 levels though a major support holds at 5,600/5,620 levels. The next leg of the rally should take us to closer to 6,000.

 

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