India Markets Weekahead: Difficult to maintain momentum

January 4, 2015

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

The new year started off with a bang as the Nifty jumped 2.4 percent to close at 8,395 for the week, with Friday alone contributing nearly 1.35 percent.

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/FilesThis is the highest closing in the last four weeks, indicating that the bulls are back with a vengeance. Encouraging news flows, the government’s reform initiatives and hopes of higher allocation by FIIs aided the bulls, which led to short covering by the bears.

A slew of temporary legislation (ordinances) has exhibited the government’s intent to move ahead with reforms despite roadblocks in the upper house of parliament (Rajya Sabha). This is encouraging, but one needs to see whether this blatant use of executive power would increase the opposition’s determination to block the reforms when they come up for voting.

Despite the BJP steadily gaining in most of the state elections, the Narendra Modi government at the centre won’t have a majority in the Rajya Sabha till at least 2017, and this could be a stumbling block.

The ordinance on Land Acquisition Act will probably help kickstart existing projects which are stuck due to land acquisition issues. But the moot question is whether these ordinances will, apart from improving sentiment, prod investors to pump fresh funds into new projects? Any serious investor would wait for them to be passed in parliament. For the same reason, I doubt whether overseas investors would immediately take advantage of increased insurance FDI from 26 percent to 49 percent.

A worker uses a welding torch to weld an iron machine at the construction site of a flyover in New Delhi January 6, 2014. REUTERS/Anindito MukherjeeThe HSBC Manufacturing PMI rose to 54.5 in December, the highest in two years, which is very encouraging in the backdrop of core sector growing at 6.7 percent in November against 6.4 percent the previous month. Continued weakness in oil prices, however, is not bringing further relief to consumers as the government decided to increase excise duty to tide over the shortfall in revenue collection. The excise concession on vehicles wasn’t extended as well. The fiscal deficit touched 99 percent of the full year target of  5.31 trillion rupees.

This turns the spotlight on spectrum and coal block auctions as well as the divestment programme, which seems to be on a slow track. The government has already announced austerity measures including cutting non-plan expenditure. This is in contrast to the general belief that government needs to spend to kickstart an economy after years of stagnation.

Although U.S. data is showing signs of a sustained recovery, there are many who wonder whether it is a case of financial prestidigitation. China and the euro zone continue to be a worry for investors. Greece could be on it’s way out of the euro zone as Lithuania makes an entry. Oil economies could be in trouble in 2015. Russia is already facing heat and the problem could spread if oil continues to soften. For a number of oil economies, the challenge would be to adjust to the “new normal” after splurging their extraordinary cash flows in recent years.

Troubled international economies and the consequent worldwide slowdown helped bring down commodity prices. But 2015 could open up worries on the export front for India as more economies start to wobble.

The coming week kicks off the earnings season with Infosys reporting on Friday. After a number of earnings warning from its peers, expectation from Infosys would be tapered. HSBC Services PMI would be keenly awaited and could provide a booster during the week.

A policeman stands in front of a boarding with an image of Modi, the prime ministerial candidate for Bharatiya Janata Party (BJP), in New DelhiThe weekend “Gyan Sangam”, a summit between top government officials and bank chiefs, witnessed a broad discussion on improving the banking sector, especially public sector units reeling under non-performing assets.

The prime minister assured the gathering about lesser political interference and there were hints of consolidation in the sector. These developments would renew interest in the banking sector.

Though markets have opened on a positive note, keeping the momentum would be difficult unless news flows, macro data and financial results continue to surprise.

Any move closer to 8,500 for the Nifty should be seen as a profit-booking opportunity. Though Modi is trying to connect the dots to ensure an economic recovery, a number of dots still remain elusive.

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