India Markets Weekahead: Volatility to continue in results season

July 7, 2013

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

After a spirited rally the previous week, the Nifty moved in a band of 150 points between 5750 and 5900, ending with modest gains of 0.53 percent at 5868. It may seem small but the extreme volatility within this band caught traders on the wrong foot.

Time and again, markets prove that predicting them in the short run is hazardous. Investors welcomed the government’s bold decision to increase gas prices but reacted negatively to its ordinance on the food security bill. The already weak rupee cracked further to 60.35 against the dollar as the election gimmick could cost the state exchequer over $20 billion.

In addition to the rupee, oil also made an upward move after the political crisis in Egypt and crossed $100 after a long time. U.S. jobs data showed that employment growth was stronger than expected. U.S. markets rallied on Friday and the 10-year benchmark yield rose to 2.73 percent, the highest in 24 months. This could again lead to withdrawal by FIIs, starting another wave of correction in emerging markets, especially India.

The weakness in rupee, already down 9 percent during the last quarter, will affect company earnings. Operating margins are likely to see reversals due to the overall slowdown in the economy and higher interest costs while MTM losses on foreign exchange liabilities could further suppress net margins. Metals, cement and the construction sectors are expected to be worst hit and profits may plunge by about 40-50 percent annually. Owing to weak vehicle sales, profits of all auto companies, except Mahindra & Mahindra, may decline. Pharma, telecom and private banks could be the only sectors which could post growth of over 10 percent.

Unilever’s open offer for its Indian unit evoked a mixed response with most shareholders staying away. Only a third of public shareholding was tendered despite the offer price being at a nearly 30 percent premium to the pre-offer market price in April.

Among the most plausible reasons from the institutional angle was to find another compelling investment opportunity to replace HUL, which would continue to have a decent weightage in the index. The money flowing to retail investors may not find its way into equity markets.

Some of Kingfisher chairman Vijay Mallya’s assets are being off-loaded by banks. Mangalore Chemicals has been bought by Deepak Fertilizers as well as Zuari Agro. It needs to be seen who would finally get control of the company.

Gitanjali Gems continued to crack from circuit to circuit – nearly 65 percent in the last month – as word got around that financiers could be selling the stock.

Every bull run brings with it a new set of entrepreneurs so enchanted by market capitalization that they concentrate more on reverse engineering to achieve their goals than through performance of their business. The heady concoction of market operators, financiers, PR agencies and willing promoters create a maze showcasing temporary wealth, attracting gullible investors. The story more often than not leaves a trail of bloodied investors. We have seen a number of examples recently.

In the coming week, the Nifty would remain in a broad range of 5600 to 5970 with a negative bias on fears of FII pullout. The results season would also contribute to market caution but, as mentioned earlier, volatility is here to stay.

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