India Markets Weekahead: ‎Tough for the Nifty to break out of its range

August 17, 2014

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

The Nifty continued its upward trajectory to close at a two-week high of 7,792 in a holiday-truncated week. However, this optimism was not reflected in the broader market, especially the mid caps and small caps.

Among the sectors, public sector banks, realty, infrastructure and capital goods, which led the rally earlier, have underperformed in the last few weeks whereas defensives such as FMCG, pharma and IT stood out, an irony when markets are close to a record high.

Macro data released during the week wasn’t encouraging with consumer inflation, especially food inflation, continued to soar whereas IIP data indicated a renewed slowdown. Exports data released on Thursday indicated that they grew faster than imports, though the deficit touched a high of $12.2 billion.

The Nifty has been in a broad range of 7,500-7,850 since the last two months despite FII. flows of about $2.3 billion during the period. This can be attributed to a lack of substantial triggers to push the markets into a new zone. The hopes and expectations of investors with the new government were reaffirmed with the statement of intent but it seems the markets would await the execution of that intent to break out of the range.

The quarterly results of the cyclicals and industrials that led the rally disappointed to a large extent, which again confirms that the gap between sentiment and ground reality needs to converge.

Euro zone recovery is floundering, especially in Germany, Italy and France due to sanctions on Russia. India could be a net gainer due to higher export potential to Russia due to the stand-off by the West. The Japanese economy also shrank as higher sales tax reduced consumption spending.

Closer home, the monsoon has recovered lost ground in terms of rainfall statistics, but the resultant delay in sowing could take its toll. As per the latest reports, 22 percent of the area is yet to be sown, which could result in a drop of up to 10 million tons of kharif crop. Agricultural woes will have a negative effect on the GDP; most analysts had recently increased the growth target to 5.8 – 6 percent for FY15.

Public sector banks are still battling non performing assets, especially those of ‘wilful’ defaulters, where recovery seems distant. The new norms for asset reconstruction companies taking over NPAs via security receipts also makes it less attractive for them, as the margins have been tripled to 15 percent. PSU banks will require an infusion of about 1 trillion rupees before 2019 to adhere to Basel III norms and most of it would have to be raised from the markets. It’s time to stay light on the PSU banking sector.

The much awaited prime minister’s address to the nation on Independence Day indicated the intent to showcase India as a manufacturing hub. This would again bring forth the standing demand of the business community for the ease of doing business in India. Among the first actionables, the government should review archaic labour laws along with the Factories Act to encourage building manufacturing capacities in India.

Again there is a talk of a bubble in the global corporate bond market due to easy money flow. RBI Governor Raghuram Rajan has also warned of an asset bubble building up. The question is whether the global financial system is prepared for another crack and whether Indian markets are comparatively insulated. In a financial system that is so interconnected and dependent, the heat would be felt.

Although I don’t doubt the intent and the ability of the incumbent government to deliver, I believe it would take time to prepare the ground. The markets, which are now accustomed to instant gratification, may not have the patience to wait that long.

Meanwhile, any shocks in the global markets may also rattle sentiment. The resistance zone for Nifty is 7,750-7,850 and a retreat from those levels would be a fifth failed attempt. Thus, any upside should be utilized to increase the cash position as the risk reward seems skewed. It would be tough to stay away from the crowd following the Pied Piper, but that should eventually pay off‎.

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