India Markets Weekahead: ‎Ride the election rally but skim the profits

March 23, 2014

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

The market began the week on a high note after an extended weekend but could not sustain the rally due to profit booking. The Nifty was at a high of 6570 on Tuesday but the rest of the trading days remained lackluster and it ended the week with a marginal loss – at 6495 after the extended trading session on Saturday.

Although the week was marked with heightened political activity as candidates for the general election were announced, the U.S Federal Reserve had a sobering effect on the markets. The Fed decision to continue with further tapering of $10 billion and focus on interest rates, which should start rising sooner than expected, saw corrections in most markets as the dollar strengthened.

The sanctions imposed on Russia by the United States and the European Union over its annexation of Crimea did not cause any upheaval. But one needs to see whether the sanctions will be escalated further and monitor its fallout on the world economy, especially in Europe.

In India, FIIs continued to be buyers in the pre-election rally and pumped in about $739 million last week. The rupee, which turned weak on news of the Fed decision, was quick to bounce back to 60.89 against the dollar, close to a six-month high.

The sale offer for L&T Finance and Axis Bank got an overwhelming response and the unique exchange traded fund for select PSUs managed by Goldman Sachs also received a good response, proving that quality instruments continue to be in demand.

In the coming week, we have a number of data points including GDP data from the United States, and manufacturing PMI from China as well as the euro zone. Closer home, the Supreme Court will hear a plea against a gas price hike for Reliance Industries, which has been a bone of contention for the last few months. It would be the penultimate trading week of the financial year with the derivative settlement on Thursday. Though volatility could increase, there could be a surge in long roll-overs and short-covering.

Infosys had raised concerns about its growth guidance last week. TCS had also lowered its Q4 margins and revenue estimates, leading to a scare in the IT and software sector with most frontline stocks dipping on Wednesday. A recovery followed in the next three trading sessions but Infosys continued to remain under pressure as senior-level exits continued. The weakness in the software, pharmaceuticals and consumer sectors should be utilized to build a long-term core portfolio which will be election agnostic in the longer term.

The upcoming results season would be in the midst of hectic electioneering so I don’t expect the markets to react adversely to slippages, whereas better-than-expected results would further the momentum in the specific stocks and sectors.

The first of the Reserve Bank of India’s bi-monthly policy meetings would start from April 1. I don’t expect any changes as it would be guided by CPI-based inflation, which  continues to worry the central bank. The new banking licences seem to be getting delayed till a government is elected. The list has been referred to the Election Commission.

As mentioned in earlier columns, we are in the midst of a pre-election rally. In the run-up to the election, the rally would get broader and cover the mid-caps, small caps as well as micro-caps. The participation would increase when fence sitters who missed the earlier stages start coming in.

I would suggest booking profits in the last week of April or early May as the markets would have discounted the best possible outcome by then. The risk reward would not remain favourable as any signs of an unstable government formation could be catastrophic for sentiment. Ride the rally but skim the profits from time to time.

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