India Markets Weekahead: Ride the bull … for now

November 23, 2014

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

The dream run continued for a fourth week with the Nifty closing at a life-time high of 8,477, supported by the banking sector which rallied 2.7 percent for the week.

The merger announcement of Kotak Mahindra Bank and ING Vysya Bank fired up the imagination of investors on other prospective bank mergers. The rupee fell below 62 against the dollar for the first time since March 2014 but recovered to close at 61.76. World markets rallied on China’s rate cut and ECB chief Mario Draghi’s statement that the central bank would take steps to stimulate the EU’s economy. Crude oil and gold also recovered from their lows.

The earnings season, though mixed, revealed the slowest growth in six years. Some of the top-notch broking houses have indicated estimate downgrades for FY15 as well as FY16. On the other hand, Moody’s revised its outlook for Indian companies (Non-Financial) from “negative” to “stable” on expectation of an economic recovery.

Retail inflation fell to a record low of 5.52 percent but it could be too early to expect a rate cut. November 2013 saw a record-high inflation of 11.16 percent, thus it’s natural that the November 2014 Inflation would achieve a record low before the base effect plays out from December onwards. In case data continues to be benign, we could see a rate cut around March 2015.

Trade deficit widened to $13.3 billion as a surge in gold imports nullified the crude oil cushion, even as exports struggled

with a 5 percent contraction. This has led to talks of further curbs on gold imports. The sugar sector has hogged the limelight after a long time due to an expectation of sops for the sector. Sugar has been one of the few agri-commodities which have underperformed in the last four years. Unless the sector, which supports a large population of sugarcane farmers, is incentivised, it could lead to an upheaval which any government would prefer to avoid.

A number of smaller private sector banks surged on expectation of merger deals but that would easier said than done. With the sector being highly regulated, any merger proposal passes through multiple levels of regulatory scrutiny. The IT sector turned dull towards the end of the week when hopes of U.S. visa relaxation were dashed.

The winter session of parliament begins on November 24 with nearly 67 bills to be placed before it. The important market-linked bills are:

* GST Bill

* Coal policy

* National Land Acquisition and Rehabilitation and Resettlement Bill

* FDI in Insurance

* Labour reforms through amendment of Factories Act and Apprentices Act

It needs to be seen whether this session would be as productive as the Budget 2014 session or disrupted by the opposition parties.

The Reserve Bank of India will release the current account deficit data for the second quarter, expected to be around 1.5 percent of GDP due to lower crude prices. GDP data for the second quarter will also be announced on November 28, which is estimated to be closer to 5 percent against 5.7 percent for the first quarter. The expiry week would witness additional volatility due to the important economic data as well as sound bites from parliament.

The markets are driven by sentiment and belief of a better economy going ahead, coupled with “risk on” trades. India looks the most promising among emerging markets, while most other economies are struggling. This has led to “relative outperformance” feeding on itself.

Caution is thrown to the wind due to the barrage of liquidity emanating from economic stimulus packages around the world. After nearly six months in the saddle, the Narendra Modi-led government would now be expected to start delivering on its promises. It’s advisable not to go against an overwhelming bull market. So ride the bull … for now.

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/