India Markets Weekahead: Time to prune positions in an extended honeymoon

August 31, 2014

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

The Nifty closed at a new closing high of 7,954 amid volatility in an eventful week that started with the Supreme Court ruling that the allocation of more than 200 coal blocks over the past two decades was illegal.

With nearly 3 trillion rupees at stake, this had a direct effect on the metals and power sector. It also affected banking, which has exposure to the two sectors.

The court’s verdict on the fate of the coal blocks and future course of action is expected on Sept. 1. It is not expected that licences for working coal mines would be cancelled as that would result in widespread disruption as well as financial losses and litigation. It’s possible that non-working coal mines could be de-allocated and others may be let off with penalties.

The much-awaited GDP data was published on Friday, which was a holiday to celebrate Ganesh Chaturthi, to honour the elephant-headed god of wisdom and prosperity. A growth of 5.7 percent for the April-June quarter was the best in nine quarters, albeit on a low base. This should cheer investors, although it also raises the bar going ahead.

On the other hand, there are reports that the India Meteorological Department may declare drought as nearly 36 percent of the subdivisions are facing moderate to severe shortfall of monsoon rains. The overall monsoon deficit stands at 18 percent. Industrial output would need to compensate the agriculture deficit to ensure that GDP growth remains on track, and this could be an uphill task.

The increasing concern over the crisis in Ukraine and calls for more sanctions against Russia could play out in the coming weeks. Euro zone growth remains worrisome along with high unemployment. There are expectations of another stimulus in the near future. The European Central Bank meeting on Sept. 4 could provide some clues. Closer home, skirmishes between India and Pakistan have been frequent after the cancellation of talks between the countries, although the markets are yet to take note.

The cooling of crude oil prices has led to a reduction of petrol prices in India for the third time in August. Diesel prices continue to rise and the under-recovery should even out this month or latest by October, setting the stage for deregulation of diesel prices. Oil marketing stocks such as HPCL, BPCL and IOC have been touching recent highs.

The deregulation as well as crude prices seem to have been discounted in the current prices, but this does not necessarily mean superior margins going ahead as a further fall in crude will need to be passed on to the consumer. On the other hand, coal shortages have taken a toll on power generation in western India.

In addition to the Supreme Court verdict on coal block allocations, the other important data points would be auto and cement sales for August. PMI data for manufacturing and services would be released on Monday and Wednesday respectively. Prime Minister Narendra Modi’s trip to Japan could also add to the optimism prevailing in the markets. Since the markets are a stone’s throw away from touching 8,000 on the Nifty, it remains to be seen whether overall optimism and the GDP data would help it reach the psychological figure or jitteriness due to the impending Supreme Court verdict could leave it short of the milestone.

Markets have been overwhelmed with expectations from the government, assuming that the sentiment flow will wash out any negativity. Agriculture could be a drag along with worsening geopolitical issues across the border. An adverse Supreme Court verdict could again question the continuity and stability of business in India. The recent bypoll results pointed to a resurgence of marginalized parties. This could change equations with alliance partners in the states coming up for elections in the next few months.

Although the levels are higher than I had envisaged, I continue to hold my view that a correction is overdue. We are in an extended honeymoon and it’s still time to use the opportunity to prune positions. It’s difficult to hold cash, but it’s prudent to miss immediate gains than to lose capital in the medium term.

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