India market weekahead – Partial profit-booking may be prudent before election results

May 4, 2014

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

The so-called “rally of hope” stuttered during the week as Indian markets turned volatile. The Nifty closed at 6695, down 1.30 percent. The fear of the El Nino effect and the IMD forecast of below-normal rainfall seems to have made investors cautious.

With election results two weeks away, investors need to take a stand in the next few days. Although there can be a number of outcomes, only two would be termed positive for the markets – a landslide victory or a comfortable majority to form a stable government. The other scenarios such as a fractured mandate, a third front coalition or a weak UPA or NDA coalition would deflate the sentiment built up till date as the markets have already discounted a favourable outcome.

A broker monitors a screen displaying live stock quotes on the floor of a trading firm in MumbaiIn case of a coalition getting a majority, we could see the markets getting into a short-term state of euphoria as the new government would be seen as a messiah. On the other hand, expectations would be the biggest hazard for the new government as any slip would not be overlooked.

Among the challenges for the new government, the failure of monsoon rains could be the biggest one – which could deflect its attention and resources, besides having a negative effect on growth prospects. After the initial days of bonhomie, serious investors would start getting down to brass tacks. Every action and communication would be scrutinized to check whether the delivery is as per promises made during the election.

HSBC PMI remained at 51.3 for April, indicating continued optimism, but data from the Ministry of Commerce & Industry showed a disappointing March where core sector growth slowed to 2.5 percent from 7 percent. A study of the March quarter results shows that cost-cutting has been the main reason for higher operating profits compared to revenue growth. These are one of the benefits of a slowdown. Corporates learn to be cost efficient and this helps in faster margin growth during the uptick in the economy.

Auto sales continued to be sluggish due to weak consumer demand. Maruti and M&M saw double-digit declines. This will continue for a few more months till the new government demonstrates its intent to improve the state of the economy. Although stock market sentiment has improved, consumers are yet to loosen their purse strings till they see perceptible changes at the ground level. FMCG major HUL’s results also indicated lacklustre volume growth.

After Wal-Mart’s exit, Carrefour seems to be mulling an exit from India. DoCoMo exited its Indian investments at a considerable loss. This could be a blow for international investor sentiment as India is still struggling to get decent FDI flows. We would end FY14 with a marginal decline in FDI flows and this could be another challenge for the new government.

The rupee appreciated to 60.17 against the dollar but the Reserve Bank of India seems to be keeping a tight leash and may not allow it to climb beyond 59.50. The next trigger would be the formation of the government at the centre and one would need to closely watch the RBI’s actions.

A cashier counts Indian rupee currency notes inside a bank in MumbaiThe last phase of the elections would get over on May 12 after which there would be a slew of exit polls which would have a direct impact on markets with heightened volatility.

For the last six months I have been recommending that investors participate in the pre-election rally and this has played out extremely well. A favorable outcome is already priced in and we could see the Nifty rise to about 7400 if the results meet or exceed market expectations.

In case of a fractured mandate, we could see the markets tumbling. I would suggest partial profit booking before the results as uncertainty is the only certainty in an election. A bird in hand is better than two in the bush. It’s prudent to have some liquidity in the portfolio.

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