India Markets Weekahead: Time to lighten commitments as extended honeymoon almost over

September 28, 2014

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

The past week was one of the most eventful post the general elections, and the action continued till Saturday with a landmark speech by Prime Minister Narendra Modi at the U.N. General Assembly and Tamil Nadu Chief Minister Jayalalithaa Jayaram being sentenced to four years in jail in a corruption case. Markets were volatile and the Nifty closed the week at 7,968, down 2 percent despite a recovery on Friday.

The week started on a positive note but weaker European manufacturing data and concerns about growth in China led the markets to crack.  The Supreme Court’s decision to charge a penalty as well as deallocate almost all coal blocks awarded since 1993 led to another bout of selling in power, metal and banking stocks.

The deferring of decision to raise gas prices was also viewed negatively by investors as the new government was expected to be quick and decisive. As markets were sinking further below 7,900 levels, a ratings upgrade of the country by S&P came as a shot in the arm, helping the Nifty to bounce back above 7,950.  The launch of “Make in India” campaign was hailed by industry stalwarts as a game changer, boosting sagging market morale.

People walk past the Bombay Stock Exchange (BSE) building in Mumbai May 13, 2014. REUTERS/Danish Siddiqui/FilesMaharashtra’s assembly polls in October is being viewed as an important event to judge Modi’s continuing popularity, especially following the BJP’s weak performances in recent by-polls. The Sena-BJP combine was expected to have a cakewalk due to anti-incumbency against the ruling Congress-NCP combine. But the breakup of both these coalitions could throw up unexpected results and new post-poll alliances. A weak Maharashtra government may not bode well for the industrialization story.

The RBI’s monetary policy review is due on September 30, where the governor is expected to maintain status quo. Auto sales data to be released on October 1 will confirm whether the buying spree continues in the festive season. Bajaj Auto would be the one to watch as it is expected that the company’s recently launched Discover motorcycle could change its fortunes.

The monthly revision of prices of petro products is also due. It is expected that diesel prices could be reduced for the first time since January 2009. This would be a dampener for oil marketing companies, which have been among the best performers this calendar year.

The recent volatility also brought to the fore current market vulnerability. Some international investors have also raised concerns on execution as we approach the end of the extended honeymoon period.

The new government has been able to improve sentiment by making the right noises. A charismatic leader and a hardA man looks at a screen across the road displaying the Sensex on the facade of the Bombay Stock Exchange (BSE) building in Mumbai May 13, 2014. REUTERS/Danish Siddiqui/Files taskmaster, Modi has successfully been able to project his no-nonsense attitude. But the next few months would be a testing time for execution of the government’s intent and would give crucial signals to investors. Softer crude and commodity prices have been unexpected saviors in the recent past, but solving India’s inherent bottlenecks for growth would test the capabilities of the government, especially after garnering investment support from Japan and China.

Next week – a truncated one with holidays on Thursday and Friday – could open on a positive note due to the rub-off effect of Modi’s trip to the United States.

Crossing 8,200 levels would be a tall task for the Nifty unless the results season throws up positive surprises. The recent macro data doesn’t espouse that confidence.

Continued FII investment is a necessity for the markets to hold up and that seems to be on the wane as they turned net sellers ($308 million) last week. I would still continue with my suggestion to lighten commitments as every large government event increases expectations and takes the bar higher, whereas the room for slippages and disappointment is contracting.

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