India Market Weekahead: Time to take some profits off the table

April 13, 2014

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

A rally of hope tempered by caution pushed the Nifty 1.2 percent up to 6,776 for the week. Investors believe the worst is over and a new government would be the catalyst for a sustained economic upturn. In election season, hope for a better tomorrow helps the market ignore ground realities.

A record turnout in the ongoing general election is being seen as an anti-incumbency vote. As the market continues moving up, investor hopes for a stable government get priced in, leaving hardly any room for a disappointment. On the other hand, fence sitters who got left out of the rally will join the fray, adding to the momentum already built by investors.

Although we have not seen all-round euphoria, it is distinctly visible in certain pockets. Some Gujarat-based groups have seen a stupendous increase in market capitalization.

Adani Group stocks have rallied between 35 percent and 120 percent in about two months. Gujarat Gas jumped about 62 percent in a month, with most of the gains accruing in the last week. A long list of stocks — such as Arvind, Gujarat Mineral Development Corporation, Gujarat Pipavav Port, Pipavav Defence, Gujarat Alkalies, Torrent Power — have climbed on investor expectations.

Macroeconomic data released earlier this week, however, was not benign. Industrial production data showed a decline of 1.9 percent in February, a nine-month low, led by manufacturing which declined 3.7 percent. Car sales contracted 5 percent in March. Exports too have been contracting, declining 3.14 percent in March, which would have an impact on trade deficit. The El Nino effect on the monsoon could be another reason for worry, as that would directly affect GDP and inflation.

The deal of the week was the $4 billion buy-out of a beleaguered Ranbaxy by Sun Pharma in an all-stock deal. Daiichi Sankyo becomes a minority shareholder with a 9 percent stake in the merged entity and Sun-Ranbaxy would become the world’s fifth largest generics company. It seems to be a win-win deal for everyone.

The coming week is a truncated one with two holidays on Monday and Friday but has important economic data points on inflation as well as quarterly results from technology majors such as Infosys, HCL Tech and TCS in addition to Reliance Industries and IndusInd Bank.

Inflation is expected to be slightly higher as food prices have increased due to onset of summer. Results of technology majors would be a tad lower than the past few quarters. Guidance from Infosys for FY15 is expected to show revenue growth of around 7-9 percent. The company has also started the search for a new chief executive, the first non-promoter CEO.

U.S. markets are showing signs of exhaustion but flows to emerging markets continue. It is being speculated that these flows could be due to the resumption of carry trades. China is showing signs of a slowdown and GDP data to be released on Wednesday would confirm this.

The rupee remained steady at 60.10 against the dollar. Further appreciation could affect the export sector, which is already feeling the pressure.

We could see a market correction in the coming week but momentum and fund flows will ensure support at lower levels. We still have a few weeks of the pre-election rally and the euphoria seen in a few segments will widen steadily.

If a stable government is formed, hope will turn into a conviction that nothing can go wrong — that’s when we will see the peak for the market. Remember that like market sentiment, ground realities cannot change overnight. History will repeat itself, so investors should use the arbitrage between market sentiment and ground realities to take some profits off the table.

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