India Markets Weekahead: Quality stocks to stand out in next rally

August 3, 2014

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

Reality finally dawned on the markets and we saw a sharp correction in the last two trading sessions. The Nifty closed at a two-week low of 7603, down 2.41 percent for the week.

Modi mania seems to have abated temporarily and international developments played a bigger role in influencing sentiments. The quarterly results have so far been mixed but decisively points to a slower growth this quarter.

People watch a large screen displaying the benchmark share index on the facade of the Bombay Stock Exchange (BSE) building in Mumbai December 9, 2013. REUTERS/Mansi Thapliyal/FilesThe fiscal deficit in the first quarter has already crossed 56 percent of the annual target, and one wonders how the government will achieve the steep revenue target unless the economy starts firing on all cylinders. As of now, that seems a few months away.

The monsoon improved dramatically, but deficit still hovers at 22 percent. Haryana, Punjab and western UP witnessed intermittent rains, which is a concern. Late rains could improve the statistical data but would create practical issues for agricultural production.

The HSBC manufacturing PMI data for July was encouraging at 53, along with core sector growth for June at 7.3 percent. The improved sentiment also reflected in automobile sales in July, which showed excellent growth for the second consecutive month with industry leader Maruti growing at 21.7 percent.

The next two months will be crucial to confirm a turnaround.

While the government’s main aim is to kickstart the economy with infrastructure projects which are expected to attract foreign investments, the neglected e-tailing sector ironically became the first to get fresh investments worth $3 billion for Flipkart and Amazon.

FIIs turned net sellers for the week at $258 million and the rupee slid to 61.29 against the dollar, the lowest since April 24.

The standoff between the West and Russia over Ukraine, in addition to geo-political tensions in the Middle East, had an effect on the international markets. Argentina’s debt default added further fuel in the backdrop of disappointing manufacturing data in the Eurozone. The inflation in Eurozone fell to 0.4 percent, increasing the risk of a “deflationary spiral”.

The U.S. economy grew at 4 percent but the jobs data disappointed. And there is an increasing possibility of the Fed hiking rates before the end of the calendar year, which could suck out the liquidity flowing into emerging markets.

Closer home, the RBI monetary policy will be announced on Tuesday. I expect status quo to be maintained as the monsoon is still deficient and the inflation data, though benign, needs a reconfirmation on it’s consistency.

Food inflation could play spoilsport for the next few months as indicated in the Economic Survey, which expects a moderation only by the end of 2014.

The results season saw favourable earnings from pharmaceuticals, FMCG and IT sectors, but the capital goods sector disappointed with both L&T and Thermax faring below expectation.

The telecom sector was upbeat with better-than-expected results of both Bharti and Idea. TRAI chairman thinks telecom tariffs could rise by 9-10 percent. I believe this could be a temporary phenomenon as Reliance Jio’s launch could lead to disruptive pricing and hamper margins in the “high growth” data services.A broker monitors a screen displaying live stock quotes on the floor of a trading firm in Mumbai May 23, 2013. REUTERS/Vivek Prakash

I expect the correction to continue for the next few weeks with the Nifty testing 7350-7400. The honeymoon is getting over as we approach the first 100 days of the new government and people would expect faster implementation of the intent laid out in the last few weeks.

Market participants had become complacent as it was easy to make money in a runaway market. There would be unwinding of short-term positions, leading to fresh selling pressure.

Even a 10 percent correction is considered healthy in a bull market and this could be a great opportunity for those who had missed out the post-election rally to re-enter. The first leg of the market rally saw most stocks rising to create a short-term high, but the next leg of the rally would be sober, with quality stocks standing.

While a fresh call would need to be taken at the support levels of 7350-7400, depending on news flows and the environment, it could nevertheless be fruitful to start nibbling into quality.

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