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Straight from the Specialists

India Markets Weekahead: Invest with an eye on the exit door

By Ambareesh Baliga
November 3, 2013

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

Markets touched new highs this week but the usual euphoria was missing as it wasn’t a broad-based rally. Finance Minister P. Chidambaram said the worst may be over for India as the current account deficit is getting under control while a bumper harvest could help rein in food inflation and boost the rural economy. Hopes of a revival and the mirage of green shoots coupled with international liquidity due to delayed U.S. Federal Reserve tapering has fuelled this rally, which is expected to spread to other sectors that are comparatively under-valued.

But the ground-level situation is in stark contrast to the optimism in the indexes. October auto sales were flat to negative for a number of automobile majors despite huge discounts. The festive season hasn’t spurred sales in white goods either, as food inflation reduced the disposable income of the middle class.

The Reserve Bank of India’s (RBI) clampdown on zero percent interest schemes also dampened the mood. Manufacturing PMI released on Friday showed a contraction for the third straight month. Gold buying generally peaks on Dhanteras but Friday marked an unusually subdued demand for gold.

Markets have ignored negative macro data in the past few weeks — inflation, industrial production and PMI — but has latched on to positive current account deficit data, thanks to inflows due to the swap window introduced by the RBI for FCNR deposits. The curb in gold imports has also resulted in the current account deficit improving over the past few months. One needs to see whether non-oil imports continue to fall while exports, which have shown an uptick, continue to surge.

The earnings season has been better than expected so far. The biggest surprises were from the public sector banks, which were expected to report higher provisioning due to deteriorating asset quality. Among other notable results, Maruti surprised the street thanks to yen depreciation. Bharti Airtel improved its margins though its African acquisition continues to be a bother.

The Kirit Parikh committee has suggested an immediate hike in diesel, kerosene and cooking gas prices. With state elections in November and December, it is doubtful whether the government will accept the recommendation. The winter session of parliament would see the tabling of the direct tax bill. The government may also seek to raise the FDI cap in insurance to 49 percent.

Though retail investors are yet to return to the markets in a big way, they should start participating if the indexes manage to hold the fort for the next few weeks. We could see a sectoral churn with beaten-down sectors outperforming. Sharp moves in these stocks would entice fence sitters and thus broaden the rally. There was a sharp recovery in public sector banks last week with the Bank of India rallying nearly 30 percent in two days.

The question remains whether the markets are ignoring ground realities. An equity investor cannot stay out when the indexes are touching new highs. Some out-of-favour sectors such as engineering, capital goods, auto ancillaries, metals, and public sector banks would continue to see heightened interest. In case the rally gets extended, we could also see midcaps and small-caps getting back in favour.

The feelgood factor thrust upon us may not be allowed to fizzle out soon because of impending elections. The pre-election rally may have started but investors should be careful not to get carried away, unless macro data shows a decisive improvement. Invest with an eye on the exit door, ready to move out.

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