India Markets Weekahead: Lack of positive triggers in the near term

September 29, 2013

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

Indian markets are in a corrective phase after RBI Governor Raghuram Rajan’s monetary policy review on Sept. 20 put a damper on investor expectations. If Rajan had played to the galleries, we would have seen a stock market bubble. The move from pessimism to euphoria — a rally of nearly 20 percent in less than three weeks — without any perceptible change in ground realities, would have led to a bull trap. Though participation levels were not high, FIIs had turned buyers and it would have been a matter of time before dormant market participants jumped into the fray.

Barclays is the latest to cut India’s GDP forecast to 4.7 percent. Most of the others have cut their forecast to below 5 percent although the government is still hoping for an early recovery. The banking sector was under pressure after Fitch cut its rating for a number of public sector banks such as Punjab National Bank, Bank of Baroda and Indian Bank.

Euro zone recovery seems to be gathering pace. China is also firmly on the path to recovery. The United States would exhaust its borrowing capacity by Oct. 17, and faces a government shutdown unless the federal borrowing cap is increased. The tapering of quantitative easing, which was postponed in September, may be implemented next month.

Closer home, the RBI will unveil current account deficit data for the first quarter on Monday. It is expected to be between 5.2 percent and 5.4 percent but the silver lining is that it would have peaked in the first quarter. We could see it correcting in subsequent quarters, due to lower gold imports and higher software exports, bringing it closer to the Budget target of 4.8 percent.

Other numbers out this week include manufacturing PMI on Tuesday and services PMI on Friday. Auto and cement sector data should drive markets in the short term, although an extended monsoon could affect cement sales further. Auto sales may not cheer the markets after witnessing a healthy year-on-year growth due to a lower base.

Results season for the second quarter will kick off with Infosys on Oct. 11. The IT pack should continue cheering the markets and might see further upgrades. The public sector banks and rate-sensitive sectors such as realty will be hit the hardest. A slowdown in fresh investment will hurt the capital goods sector.

The auto ancillaries sector could be the dark horse due to the recovery in developed economies and improved competitiveness after currency depreciation. The U.S. FDA crackdown on Indian pharma companies seems to be getting worse each day. Despite the risk, companies as yet unaffected are commanding huge premiums.

As elections draw nearer, internal conflicts seem to be taking centre stage. Rahul Gandhi slammed a cabinet move to protect convicted lawmakers, embarrassing the government on Friday. The SGX Nifty fell 50 points in late trade on Friday but is expected to recover as the threat to the government would get diluted over the weekend.

Markets will continue drifting lower due to lack of positive triggers in terms of government policy action or positive macro data. The Nifty is in the broad range of 5500 to 6000. Election fever will take the focus off the economy while the government concentrates on welfare programmes and public relations. But serious investors will not loosen the purse strings unless India gets a stable government at the centre.

It is time to restructure one’s portfolio and hold a substantial cash amount to make the best of opportunities till the end of the year. Use this October-to-December window to build your portfolio as we could see a pre-election rally in the coming year, based on hopes of a stable government.

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