India Markets Weekahead: Continue pruning your portfolio

September 14, 2014

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

Markets began the week on an optimistic note with the Nifty touching a new high of 8,178 but fatigue was noticeable in frontline stocks as action shifted to the mid- and small-caps.

Though continued weakness in crude oil has been fanning the move beyond 8,000, the fear of a U.S. Fed rate hike and the flood of fresh paper from the government stable kept the lid on the upside. Global markets were also not supportive with most ending in the red except some Asian markets and Japan, which gained due to a weaker yen. The Supreme Court decision on the illegal allocation of coal blocks was deferred, prolonging uncertainty for the sector.

Index of Industrial Production (IIP) data, released after market hours on Friday, turned out to be a dismal 0.5 percent, marking the third consecutive month of decline. Though a number of analysts believe this could be a blip and not a cause for alarm, figures remained positive primarily due to double-digit growth in electricity.

August could see the power sector taking a breather due to feedstock shortage. It’s also surprising that despite a huge uptick in automobile sales, consumer durables showed a contraction of 20.9 percent, signifying a slowdown in the other constituents. This again brings to the fore my earlier argument about the difference between sentiment in stock markets and reality on the ground.

There is still huge arbitrage and the gap needs to narrow either with an immediate uptick in the economy or a correction in the stock markets. The 5.7 percent GDP figure for the first quarter also needs to be seen in the light of general elections, when spending shoots up abnormally.

Consumer inflation dipped marginally to 7.8 percent in August but was still higher than consensus estimates. Softening of A man looks at a screen across the road displaying the Sensex on the facade of the Bombay Stock Exchange (BSE) building in Mumbai February 6, 2014. REUTERS/Mansi Thapliyal/Filescrude and the subsequent expectation of a cut in retail fuel prices could help to a certain extent but one needs to see whether food inflation could be contained through proactive measures in the next few months.

By-elections are not usually given much weightage by the markets but the one held on Saturday, especially for seats in Gujarat, Rajasthan and Uttar Pradesh would be watched closely. The upcoming assembly elections in Maharashtra and Haryana would also be a test for the “Modi wave” that swept India in May.

The Cabinet cleared the way for divestment in Coal India, NHPC and ONGC, which should fetch about 430 billion rupees. This announcement was greeted with a fall in their stock prices as investors prefer to wait for the public offer, which is usually offered at a discount. This is also bound to suck out liquidity in the short term. If the sale is successful, we could see the emboldened government lining up a number of other issues before the end of the fiscal year to utilize market buoyancy.

The IPO market should also see a spate of issues later this year. Snowman Logistics, which got listed on Friday, saw nearly 70 percent gains on its debut. Unlike the past few months, when most FII funds flowed to the secondary market, they could get divided between primary offerings going ahead.

Markets are at a level where even a fall of 300 points on the Nifty would be a considered a consolidation and one could see buying coming in from those who missed the rally. The expected correction on Monday could see buyers at lower levels, but I strongly believe that macro data could puncture sentiment in the near future.

People watch a large screen displaying Sensex on the facade of the Bombay Stock Exchange (BSE) building in Mumbai December 9, 2013. REUTERS/Mansi Thapliyal/FilesThough the government has been taking the right steps to bolster confidence, the economy will not reflect the same unless big projects take off. And this is yet to happen. A delay of another month or two, and we may not get the benefits in the current fiscal.

Softer crude and commodity prices have been the only saviors. The big question is whether the markets will have the patience to hold on, especially when we are living in an era of instant gratification. Continue pruning your portfolio to the extent of 20 percent in cash or cash equivalents.

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