India Markets Weekahead: It’s time again for an election year ‘rally of hope’

January 19, 2014

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

Despite a volatile Friday, it was a good week for the markets and saw the Nifty close about 90 points higher at 6,261, with sentiment supported by better-than-expected quarterly results and benign inflation data.

The few earnings that disappointed investors seemed to affect specific stocks without having a bearing on either the sector or the markets.

Politics took centrestage last week with the All India Congress Committee anointing Rahul Gandhi as campaign leader for general elections this year. The Bharatiya Janata Party, led by Gujarat Chief Minister Narendra Modi seemed to be in hibernation, possibly preparing a fresh strategy after the Aam Aadmi Party’s strong showing in the Delhi state elections.

With just about two months before the financial year ends, Finance Minister P. Chidambaram is on an overdrive to ensure he sticks to his promise of maintaining fiscal deficit below 4.8 percent of India’s GDP. Though the Powergrid FPO was a success, the proposed divestment in Indian Oil was blocked by a ministerial panel. The divestment in Hindustan Zinc, through an auction, would also be important to achieve the finance minister’s target.

On the other hand, the Congress-led government may continue with populist measures in the run-up to the elections. The cap on subsidized LPG cap is expected to go up to 12 from nine, adding to the subsidy burden.

Rating agency Moody’s has maintained a stable outlook for India but the election outcome will surely have a bearing on this rating going ahead.

Reliance Industries’ results were better than expected. Though the petrochemical margins were lower, the oil and gas business contributed to the bottom line. These results may not be a game-changer but will help the stock inch up. The bigger triggers ahead for Reliance would be the gas pricing, its telecom launch and the shale gas business.

Tata Consultancy Services corrected sharply despite better profitability. The street was disappointed by its volume growth as well as margins.

Pharma firm Ranbaxy continued to be under pressure after the U.S. FDA issued another warning. Telecom stocks, led by Bharti Airtel, slipped due to fears of aggressive pricing in the spectrum auction as Reliance has entered the fray.

U.S. housing data disappointed but industrial output rose for the fifth month, showing the strongest quarter since 2010. Economic data from China is due next week and will help determine the mood for Asian stocks. The euro zone also seems to be getting back on track with increased confidence but a fear of deflation is bothering economists. Moody’s recently raised the credit rating of Ireland to investment grade while France was dubbed the “new sick man of Europe”.

The coming week will see L&T, HDFC, Cairn India, Kotak Mahindra Bank, Ashok Leyland, Asian Paints, Ultra Tech Cements, Biocon, Raymonds and Zee Entertainment announcing results.

These earnings could affect the mood, but all eyes would be on the Reserve Bank of India (RBI) policy later this month on Jan. 28. I expect the RBI governor to maintain status quo on the rates in light of sharply lower inflation, but closer to the policy date, market expectations could build for a rate cut.

The vote-on-account budget is set for Feb. 17 after which general election dates could be announced. One should utilize corrections to buy as we could see a breakout in February.

In an election year, four to five months is long enough to change the contours of the battleground and perception among the electorate. This will no doubt lead to volatility but a “rally of hope” gets repeated every election year and it would be no different this time around.

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