India Markets Weekahead: Use current market opportunity for directional trades

November 9, 2014

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

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/FilesMarkets held up in the truncated week and settled comfortably above 8,300 levels. The government’s reform push, supported by domestic news flows and positive international markets ensured stability in the new zone. Soft commodity prices, especially crude, gave markets a further fillip.

Gold touched a four-year low and markets were high on expectations of an early interest rate cut by the Reserve Bank of India. The cabinet expansion and Prime Minister Narendra Modi’s ten-day trip to Myanmar, Australia and the Fiji Islands is expected to further fuel positive sentiments.

The markets again seem to be in a mode where all warning signals and negative news flow get inundated by the flood of positive sentiments. Most of the auto majors failed to show growth despite the festive season in October. The HSBC services PMI for October contracted to 50 from 51.6 in September. Though inflation data to be published next week would be benign, economists worry about the base effect coming into play from December, which could see inflation rising in the last quarter of this financial year. The IIP data for September may not show much improvement over August.

Gross NPAs, especially of the PSU Banks, have increased sharply as per the September quarter results. It is expected that another 600 billion rupees to 1 trillion rupees of bad loans could be restructured by banks, adding more toxic assets to the industry in the next few months. Power companies continue to face coal shortages and we need to see how many are successful in importing coal by taking advantage of softer prices. In this backdrop, it is imperative for the government to auction de-allocated coal mines without much delay. Despite buoyant markets, the divestment plans seem to be getting derailed due to opposition from trade unions.


The Bombay Stock Exchange (BSE) building is pictured next to a police van in Mumbai April 9, 2014.REUTERS/Danish Siddiqui/FilesQuarterly results have been mixed but mostly in line or better than expected. The ones failing to meet expectations, like IPCA Labs, Escorts, and Mahindra & Mahindra, were castigated by the markets. L&T may also see some pressure next week as its hydrocarbon business is till witnessing margin pressures and profits were bolstered by other income.

Markets could continue to be buoyant despite valuations reaching the higher end of the band, based on the expectation of foreign investment flows and an improving economic situation. It’s been a rather smooth run for the government and the markets, which could result in complacency setting in.

Historically, FIIs have booked profits in December and this year may not be very different as the last nine months have yielded records gains.

The government’s promises and intent exhibited in the last few months would need to be converted into action as people will start demanding the deliverables. The saving grace could be a renewed market expectation for the upcoming budget. The biggest risk the market currently carries is the “balloon of expectation”. One should utilise the current opportunity for directional trades rather than fresh investments unless the valuations are compelling.

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