India Markets Weekahead: Await a sharper correction to nibble in

October 12, 2014

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

The truncated week which opened after a five-day vacation was in a sombre mood except on Thursday, when markets bounced back due to a dovish Fed commentary. Friday again saw a correction, with the Nifty closing the week at 7860, down 1.07 percent.

People walk past the Bombay Stock Exchange (BSE) building in Mumbai May 13, 2014. REUTERS/Danish Siddiqui/FilesThe prospect of world economic slowdown perturbed international markets, and the Dow saw its worst week since May 2012, which in turn affected Indian markets. FIIs continued to pull out, increasingly worrying traders who are already baffled by the volatility.

The results season started off on a positive note with Infosys declaring better-than-expected profits and a bonus of 1:1. Although the stock rose 7 percent, it wasn’t enough to support sentiment in the rest of the market including the IT pack.

The automobile sales data for September continued to show an uptick while the HSBC PMI data for September was mixed, with services rising to 51.6 but manufacturing declining to 51.

The electoral battleground for assembly polls in Maharashtra and Haryana saw heightened political activity. The polls on October 15 would result in another market holiday. Results will be declared on October 19, which would have a bearing on the markets.

It has been more than five months since the Narendra Modi-led government took charge, and there are signs of restlessness regarding the pace of reforms. Although sentiment is still positive, it will not translate into real economic gains unless changes are visible on the ground. The IIP data for August too pointed towards this, with an abysmal 0.4 percent growth against an expected 2.5 percent. A number of sectors such as consumer durables, manufacturing and capital goods are slowing down.

Surprisingly, electricity generation grew 12.9 percent despite feedstock shortage. The bellwether pharma sector has lately been under scrutiny from the USFDA while a few international brokerage houses have downgraded the IT sector to neutral.

A broker monitors share prices while trading at a brokerage firm in MumbaiThe manufacturing sector may not have positive surprises in the results season as indicated in the macro data. Thus, lack of positive triggers could limit the upside for the markets in the near term.

Falling crude oil prices would help reduce the fiscal deficit significantly. Other commodities including global food prices which slumped to a four-year low are pointing towards a slowdown, spooking international markets. The Ebola outbreak too had an impact.

While crude oil and commodity corrections are positive for India in the longer term, the country cannot escape the negative international sentiment in the short term because it is a net importer. Oil marketing companies have been outperformers due to weak crude prices but retail prices may be cut sharply after the assembly polls on October 15. This would have a marginally positive impact on inflation. Food Inflation too is expected to be benign with the onset of winter in the next few weeks.

The markets have a strong support when the Nifty trades between 7800-7850, but it is highly probable that the index could break this level in the current week, triggering a technical correction.

The last few weeks were supported by domestic institutions and private investors absorbing sales by FIIs. The breach of support levels could unnerve traders, resulting in a further fall for the Nifty and opening up the 7400-7800 band.

If the government is able to successfully implement its reform agenda, it could be the beginning of a golden period for the Indian economy. The country’s growth story would get highlighted among slowing world economies, including emerging markets, thus attracting long-term funds.

Low commodity prices, a relatively stable currency and a huge consumption story placed India at a similarly unique spot in 2009 amidst the global meltdown. We frittered away the opportunity then, but I am hopeful that 2015 would be different under the new leadership.

The next few weeks could provide an opportunity to buy at much lower levels. There would be no need to rush, but start nibbling into infrastructure, capital goods, cement, metals, power and automobile sectors as these would be the biggest beneficiaries of an economic rebound.

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