Markets Weekahead – Invest in sectors which will rebuild India

January 18, 2015

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

Brokers trade on computer terminals at a stock brokerage firm in MumbaiThe markets rallied after RBI Governor Raghuram Rajan turned ‘knight in shining armour’ by cutting the repo rate by 25 bps at a time when stocks were tottering due to global factors. The Nifty closed on a six-week high of 8,513, up 2.8 percent.

International cues dominated the markets in the last few weeks, culminating with the delinking of the currency peg between the euro and the Swiss franc. The unexpected decision by the Swiss National Bank is widely seen as the beginning of the demise of the euro. Oil finally bounced back to end the week higher after seven consecutive weeks of decline, but this could be just a pause before the next phase of weakness.

The other macro cues during the week which also provided impetus to the markets were the benign WPI data and the narrowing of trade deficit to a 10-month low, although concerns still remain on weak exports. Prime Minister Narendra Modi has reassured that the fiscal deficit target of 4.1 percent would be sacrosanct, but divestment plans are still on a slow track considering we have just about 10 weeks before the end of the financial year. The fourth consecutive increase in excise duty on petrol and diesel points to the fact that there is stress on finances which has forced the government to cut expenditure.

There are a number triggers in the immediate future in addition to Q3 corporate results. These include the ECB meet on January 22, elections in Greece on January 25, the FOMC meeting and Chinese GDP and PMI data. Above all, U.S President Barack Obama’s three-day visit to India as chief guest for the Republic Day celebrations would be the highlight. We could expect a few announcements as discussions would include areas like defence, intellectual property rights, investment in manufacturing, renewable energy cooperation, civil nuclear deal, H1B visas, to name a few. The Delhi elections would be an important political milestone for the Modi government. It needs to be seen whether these triggers provide further fillip to the bulls in an already exuberant market or provide a reason for the bears to cool the market. The Reserve Bank of India seal is pictured on a gate outside the RBI headquarters in Mumbai

The results season, which started on a positive note with Infosys, continued to meet analysts’ tapered expectations. Earnings from Reliance, TCS and Wipro were all in line with estimates. The overall sentiment is so upbeat that negative surprises could have isolated reactions.

The first few days of 2015 have set the tone for volatility in the foreseeable future, especially in light of the fragile global economy. Though India can look forward to a revival, it cannot remain insulated to the economic vagaries around the world.

The current year could be a year of consolidation with high intermediate volatility. It could also be a year for rebuilding the country, which would shift focus to underperforming sectors of 2014 such as infrastructure, power, mining, and continued interest in cement and manufacturing. The sectors dependent on international trade could face cross currency headwinds as well as uncertain demand. Thus it’s time to invest in those sectors which will contribute to rebuilding ‘the India story’.

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