India Markets Weekahead: Investors should wait for a correction to buy

October 13, 2013

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

Markets continued a strong rally to close the week around 3 percent higher. After the partial U.S. shutdown was confirmed and triggered speculation over the postponement of QE tapering, a weakening dollar and the rupee’s subsequent appreciation also helped lift the mood.

Though the current account deficit for the first quarter was a better-than-expected 4.9 percent, IIP data that came in after market hours on Friday showed India’s industrial production had slowed to a dismal 0.6 percent in August. This suggests that buoyancy in the stock markets was driven by liquidity and sentiment, while things are different on the ground.

Infosys kicked off earnings season this week by missing market forecasts but with a higher guidance for FY14, one that would raise the bar for IT sector rivals TCS and HCL Technologies who have outperformed Infosys for several quarters. Although the valuation gap between TCS and Infosys has reduced, any sustainable upgrade will depend on the consistency of performance going ahead.

Results expected next week include that of private sector banks IndusInd, Axis and HDFC Bank; IT majors TCS and HCL Technologies; and others such as Reliance Industries, Larsen & Toubro and Bajaj Auto. While these companies should meet or better market expectations, there could be disappointing results the following week from public sector banks, infrastructure, realty majors and industrials.

The U.S. debt ceiling deadlock continues with talks failing on Saturday. This could keep the market on tenterhooks as the Oct. 17 deadline approaches. Although the S&P has ruled out a downgrade for now, a dynamic situation could arise. A ripple effect will be felt by India’s software sector that has been the best performer in the past few months. In case of an improbable default, a “risk off” could reverse the rally we witnessed in the global markets.

Inflation data, both CPI and WPI, would be declared on Monday, which combined with dismal IIP data could have an immediate bearing on the markets. High food inflation doesn’t seem to be easing despite a good monsoon. There is also the fear that the extended monsoon could threaten standing crops. Higher-than-expected inflation could spur the RBI Governor Raghuram Rajan to increase the repo rate by another 25 bps at his monetary policy review on Oct. 29.

Some leading public sector banks have lowered interest rates on retail loans to stimulate demand but the RBI is of the view that this would lead to further deterioration of asset quality. With elections in states such as Madhya Pradesh, Delhi and Rajasthan in the coming months and general elections due in 2014, an estimated 200 billion rupees in election expenses would flow into the system, especially the rural areas, which could drive the consumption theme. Textiles could also be an emerging theme as India’s nearest competitor Bangladesh is facing buyer resistance due to working conditions in its garment units.

The recent market rally has left hardly any room for slippages. A few disappointing results from the heavyweights or disappointing macroeconomic data could derail the current rally. We could, however, witness a rally after November if state elections show a specific trend.

With the current account deficit seemingly under control and the rupee appreciating, the worst seems to be behind us. This does not mean that the green shoots are appearing all over. Asset building is dependent on progressive policies that may not be a priority during the last leg of the incumbent government.

This is an excellent traders market but investors should wait for a correction to buy. A truncated week with a holiday on Wednesday may see the Nifty upside capped at about 6200. As mentioned in earlier columns, investors will get a number of opportunities in the next few months to pick a portfolio as volatility is here to stay. So keep your list ready.

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