India Markets Weekahead: Driven by hope in an election-led rally

January 5, 2014

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

The New Year was ushered in with a steep and sudden correction in the broader indexes, with the Nifty closing 1.63 percent lower at 6,211. However, the mid-cap and small-cap indexes outperformed.

Though the holiday mood was evident, it was a politically charged week. The newly installed Aam Aadmi Party (AAP) government in Delhi won a confidence motion with the support of the Congress. They subsequently announced power subsidies after granting water sops last week. Prime Minister Manmohan Singh addressed a rare press conference, the third in 10 years, announcing his intent of handing over the baton to a new prime minister.

Though Singh’s press conference did not have any anything for the markets to react, the media space grabbed by the AAP and its rising momentum is forcing market analysts to take stock. A slew of India Inc executives, such as former Infosys CFO V. Balakrishnan, have joined the AAP in the past few days, improving its credibility. The campaign of Narendra Modi, the Bharatiya Janata Party’s (BJP) prime ministerial candidate, could hit a road bump due to the new party’s increased appeal.

Markets had been betting on a BJP-led government and are again getting worried about a fractured mandate. The first 100 days of the Delhi government would be crucial for the AAP to prove their administrative capabilities but unfortunately for them, this period before the general elections would also be critical to reach out to the electorate across the country.

Meanwhile, automobile sales numbers were disappointing, as expected. Manufacturing PMI decelerated to 50.7 but still suggests growth. India’s fiscal deficit touched 94 percent of the budgetary target but the finance minister said he was confident it would be contained within the target. These along with political concerns led to a steep intra-day correction on Thursday.

On the other hand, the euro zone seems to be moving steadily on the path of recovery with manufacturing PMI at a high of 52.7 in December. The United States is also confident of growing at 3 percent in 2014, which could trigger further tapering. Indian exporters seem to be in a sweet spot with a recent currency depreciation coupled with recovering developed economies.

December-quarter results kick off on Jan. 10 with Infosys reporting numbers. Expectations would be high as analysts believe that N R Narayana Murthy will deliver as executive chairman despite the churn among top executives. The current price of 3,565 rupees does not leave any room for disappointment.

Services PMI, to be announced on Jan. 6, should witness an uptick. But IIP data for November, to be released on Friday, could be weak. The results season could also be tepid going by advance taxes paid in December. Inflation data for December, which would be released on Jan. 16, should be benign as food inflation seems to have cooled off sharply.

We are in an election-led rally where markets are largely driven by hope. The fundamental data points as well as news flows that lead to a correction in the markets could be an opportune entry point for those who missed out in the last few months. The coming months could see mid-caps and small-caps performing well, although these should be a minor proportion of the portfolio.

The core equity portfolio should be one that will be able to withstand election uncertainty. Markets have strong support for the Nifty at 6,150 but crossing 6,350-6,400 decisively in January could be an uphill task.

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