India Markets Weekahead: Time to wait and watch

April 14, 2013

(Any opinions expressed here are those of the author and not of Thomson Reuters)

A volatile week saw the Nifty closing 0.45 percent lower at 5528 after disappointing numbers from IT bellwether Infosys, which missed expectations on most parameters. The Bangalore-based company’s results also affected other IT stocks, with a number of them closing lower.

The markets have again proved that the biggest challenge for industry leaders is to manage expectations. Infosys, which was given a big thumbs-up after spectacular December quarter results, was pushed back to levels from where it had earlier risen like a Phoenix.

The question on everyone’s mind is whether the December quarter was an aberration. The IT sector would see a definitive shift from Infosys to stable performers like HCL Tech and TCS as the market pays a premium for consistency.

The 10 billion euro Cyprus bailout was approved on Friday but there is still uncertainty as to where the additional 6 billion euros would come from. The next casualty in the EU’s debt crisis could be Slovenia, but unlike Cyprus, domestic depositors there would face the axe.

Closer home, the political circus continues with the decks being cleared for a general election, which could be a few months away – probably between November 2013 and February 2014.

Markets would be volatile in the run-up to the polls, but data from the last 20 years shows that there is an upward bias six months prior to elections, except in 1998 when the political crisis had reached its nadir with frequently changing governments.

Data for the same period for post-elections shows that polls have a short-term knee-jerk impact on the markets, which are eventually driven by inherent demand in the economy and infrastructure spend.

The industrial growth rate slipped to 0.6 percent in February but was better than what analysts estimate. This, coupled with marginal moderation in retail inflation to 10.39 percent, has raised expectations of a rate cut by the Reserve Bank of India next month to boost growth.

Global food inflation is also moving down, thanks to lower prices of ethanol-producing crops such as maize, wheat and sugarcane as the demand tapers off.

FIIs have been net sellers of Indian stocks whereas domestic institutions were marginal buyers. The U.S. markets are flush with liquidity with more than $60 billion pumped into stocks and ETFs this year. I don’t see any reason why FIIs should be pouring fresh funds in Indian markets in view of underperformance and the prospects of early election, especially when other opportunities exist.

Gold is finally losing its sheen after a spectacular rally in the last 10 years, closing below $1500 for the first time since 2011. Oil prices have also started correcting and should improve the current account deficit, taking pressure off the rupee.

Despite a disappointing start to the results season, expectations are tempered and any positive surprise in earnings could provide temporary boost for the markets.

The most important among upcoming results would be Reliance Industries on April 16. Refining margins would be lower than last quarter and with gas production falling to their lowest level, the results could disappoint. TCS, Yes Bank, Wipro and IndusInd Bank are some of the other important results in the truncated week, with a market holiday on April 19.

Most mid-caps have corrected to such an extent that valuation looks mouth-watering. The problem lies with fear of the unknown, especially on the corporate governance front – which carries a disclaimer that “show of corporate governance in the past is not a guarantee that there are no skeletons in the cupboard”.

It would take a while for investors to trust mid-cap promoters and we could see a different crop participate in the next bull-run.

Sometimes the best trade is no trade at all. We are in a situation where it’s best to stay out and watch. It is time to identify potential stocks to track and buy only when the markets have bottomed out.

We may end up buying at a price which could be higher than the current market price, but that’s the premium we should be willing to pay to avoid the pain associated with bottom fishing.

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