India Markets Weekahead: Results of state elections a key driver

By Ambareesh Baliga
November 24, 2013

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

Markets had been on a roller-coaster ride but closed weak for the third week in the row with the Nifty in the 5950-6000 range providing support.

A hint from the U.S. Federal Reserve on tapering its bond-buying programme was enough to spook the markets. Though this is expected in the first quarter of the new year, it remains to be seen whether chairman-elect Janet Yellen’s dovish stance would postpone it further.

Closer home, state elections kicked off with Chhattisgarh recording a 75 percent turnout in the second phase. The elections in Madhya Pradesh, Chhattisgarh, Rajasthan and Delhi will have a significant bearing on sentiment in the run-up to general elections due in May.

U.S. markets touched a new high based on favourable economic data but the euro zone slipped with PMI dropping to 51.5 from 51.9. China performed well on the back of last week’s announcement of financial and economic reforms.

Globally, all eyes will be on the nuclear talks with Iran which would have a bearing on Brent crude prices. After U.S. President Barack Obama’s comment that American sanctions may continue despite a resolution, the Brent crude premium against Nymex crossed $16 — the highest in eight months. U.S. crude output has been at its highest since January 1989 and the current winter inventory the best since 1930, which may keep a cap on oil prices.

In India, FIIs turned sellers having an effect on frontline stocks although  defensives such as FMCG, pharmaceuticals and IT corrected more than cyclicals, automobiles and banks. I believe there is a clear shift of interest to these sectors. Cyclicals and banks have been underperformers for a while, thus providing the “valuation gap” for investors to pump in funds based on hopes the tide will turn after May 2014.

Elections and markets have a peculiar chemistry. In the last few months, expectations drove the markets over-riding the fundamentals. Though the frontline indices may not move as swiftly, participation would spread to other sectors, thus broad-basing the rally. Generally, a fresh rally has been led by automobile stocks, and this time we have both Tata Motors and Maruti leading from the front, backed by Mahindra & Mahindra.

The next Reserve Bank of India monetary policy on Dec. 18 may continue to be hawkish with another 25-50 bps raise in the repo rate but this could be the last in the series. The Indian 10-year G-Sec yields would also peak by then. Food inflation, which has been the villain in the pack, would taper off by mid-December due to the monsoon effect. Core inflation has already peaked. The swap window for FCNR deposits is closing on Nov. 30 but by then we would have garnered more than $25 billion.

The current account deficit situation is comfortable and the trade deficit is improving with higher exports. The rupee is expected to remain in a broad range of 61 to 64 rupees against the dollar. GDP data for the quarter ending September will be unveiled on Nov. 29 and is expected to grow at 4.5 percent, a tad better than the last quarter. Thursday would see the expiry of November contracts but I expect a good rollover into December.

State election results will be announced on Dec. 8 which could be a turning point for the markets in the coming months. The markets will continue to be volatile but one should utilize corrections to add a trading portfolio with a five-six month horizon.

General election results could throw up a surprise, so one should not try to bet on the outcome. I don’t expect the markets to break the current Nifty support zone of 5950-6000, while 6350 could be good resistance for the next few weeks.

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