India Markets Weekahead: Prudent to hold cash
(Any opinions expressed here are those of the author and not of Thomson Reuters)
Indian markets ended steady on Friday after rising to its highest intraday level in nearly two months. The Nifty closed up 0.33 percent at 6029, marking its fourth weekly gain.
A weakening rupee led to intervention by the Reserve Bank of India (RBI), which tightened liquidity and lifted short-term interest rates on Monday. Though the central bank’s stance against currency speculation has made it all the more difficult for speculators, it also sent bond yields soaring and led to concerns that an increased cost to borrowers would curtail growth that is already limping at 5 percent. Bond portfolios recorded losses, wiping out gains over the last few months.
The rupee remained weak at 59.33 to the dollar on fears that the RBI’s measures could fail. The moves also weighed on banking stocks with the Bank Nifty falling 6.4 percent for the week. The results of a few private banks such as Kotak Bank, HDFC Bank and Axis Bank revealed they could also be plagued by worsening credit quality.
The government announced a slew of economic measures last week in order to boost sluggish economic growth and support the rupee. The relaxation of foreign investment rules, aimed at attracting capital, fell short of market expectations due to lingering doubts over caveats and long-term inflows in times of political uncertainty.
FDI rules were eased for several industries, including insurance and telecom. The foreign investment cap in telecom, previously at 74 percent, was done away with altogether. But an industry plagued with several regulatory issues and uncertainty would find it hard to attract fresh entrants. The reforms, though in the right direction, have failed to evoke market confidence and FIIs continued to pare down portfolios. The measures seem aimed at merely boosting sentiment, as serious investors are expected to await the election outcome to decide on long-term investment. As for earlier FDI measures, the Jet-Etihad deal is facing uncertainty and a decision by the Foreign Investment Promotion Board is expected on July 29.
Inflation continues to be a concern with a surge in food prices. The RBI governor is expected to have a hawkish stand at the central bank’s monetary policy review on July 30. The CRR could be raised to curtail liquidity. Markets are bound to view this negatively along with the contraction in industrial output and lower exports reported recently.
On the global front, jobless rates fell in only 11 U.S. states in June revealing the bumps on the road to economic recovery. The Detroit municipality filed for bankruptcy, the largest in the country’s history. And with political talks failing, Portugal seems headed for another bailout.
This week will also see the expiry of the derivatives contract, which should add volatility to the markets. India’s bank lending and foreign reserves data will also be released.
Though the benchmark index may indicate a healthy market, scratching a bit below the surface reveals the index is supported by only a handful of stocks belonging to the IT, pharmaceutical and FMCG sectors. There is visible movement of liquidity to ‘safe sectors’ and ‘dependable management’, leading to unreasonable valuations in these stocks. Most other stocks have been bleeding investor portfolios.
Reliance Industries’ quarterly results were better than expected, supported by strong GRMs and rupee depreciation. Petchem margins also improved marginally. Among the other companies reporting results, HDFC disappointed but software and tech companies such as TCS, Hexaware and Mindtree continued to please investors. Bajaj Auto performed slightly better than the street expected.
Tata Steel and Coal India unveil quarterly earnings on Monday. Prominent results that will dictate the trend on the bourses in the coming week include Larsen & Toubro, Hero MotoCorp, Maruti, ACC, HUL and Wipro. Other than the FMCG, pharma and IT majors, the remaining sectors are expected to show a strain on margins.
It would be difficult to take a call on the broader index but the market will continue to reel under pressure as the next set of results are unveiled. The monsoon session starting in August is expected to be a stormy one. It would be prudent to hold cash as even the favoured stocks seem overvalued with a high downside risk.