India Markets Weekahead: Investors to remain bullish in election season

December 22, 2013

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

A surprise decision by the Reserve Bank of India (RBI) to keep the repo rate unchanged and a dovish statement from Ben Bernanke in his last news conference as U.S. Federal Reserve Chairman improved sentiment with the Nifty closing 106 points higher at 6,274.

Markets tottered for three days during the week amid fears the Nifty could break a crucial support zone between 6,120 and 6,140. Investors had discounted a 25 bps hike in monetary policy based on inflation numbers that were the highest in 14 months. RBI Governor Raghuram Rajan should be lauded for taking a practical stance as food inflation is expected to cool considerably in December due to improved supplies and the monsoon effect.

An increase in the repo rate would have further affected an economy that is trying to break out of a slowdown. The impact of Fed tapering was neutralized by dovish commentary. Though the rupee turned a tad weaker, the markets took positive cues for India’s exports, which would enjoy twin benefits of a weaker rupee and a stronger U.S. economy.

The drubbing in recent state elections seems to have shaken the Congress-led coalition government to act. The long-pending Lokpal Bill to fight corruption in public offices was finally passed in parliament.

Indian markets have been the favourite of foreign investors, which have poured about $19 billion so far this year — higher than India’s peer economies — although lower than in 2012 when they pumped in $24.5 billion. The twin factors of current account deficit and inflation would decide whether foreign investors will continue pouring in fresh funds in the coming year.

Other macro numbers, including lower-than-expected quarterly results, would be brushed aside as skeletons of the past. The market mood in an election year is generally of hope and tends to ignore adverse fundamentals. The general elections of 2014 are expected to be bipolar and a coalition led by the Bharatiya Janata Party seems to be on a better footing. The next two months could see a realignment of opportunists and fence-sitters.

In international news, euro zone finance ministers reached a deal on handling failed banks so that taxpayers need not foot the bill. The banking system would now hopefully support economic growth rather than being a drag. In the third quarter, the U.S. economy grew by 4.1 percent, its fastest pace in 24 months. With near-zero short-term interest rates and a dovish view from the Federal Reserve, robust growth should continue in 2014.

Back home, the success of the Power Grid FPO should rekindle interest in the IPO market and the bullish undercurrent would nudge the government to float long-pending FPOs to take advantage of a favourable environment. Advance tax figures show a tapering of growth as reflected in IIP data published earlier this month.

In relief for Reliance Industries, the cabinet allowed the company to charge higher prices for gas. This could be followed by an improvement in gas output, which has been falling consistently.

A ruling by the Delaware Supreme Court provided a window for Apollo Tyres to wriggle out of $2.3 billion merger with Cooper Tire. The company’s shares, which had been under fire since the deal’s announcement, have recovered. However, analysts would still be wary of a management that took this undue risk.

Markets will continue to be bullish in election season. The highlight would be a broad-based participation from sectors that have not performed in the last few years — capital goods, infrastructure, auto ancillaries, textiles and oil & gas. These will provide value assuming political stability and a government that is focussed on reforms.

Banks and metals are the other sectors that have performed in the past few weeks and could be front-runners in a rally. Though IT, pharma and FMCG could continue performing, the focus would shift to mid-cap stocks where the valuation gap has broadened. Overall, utilize any correction to top up the portfolio as staying out of the markets would mean losing a huge opportunity.

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