India Weekahead: Markets firmly entrenched in pre-budget rally

February 15, 2015

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

The markets had enough reasons to correct sharply during the past week but rallied due to a wave of positive sentiment. The Aam Aadmi Party (AAP) stormed back to power in Delhi with an unprecedented mandate, capturing 96 percent of the total seats. AAP’s victory in the 2013 election had led to a correction in the markets, but this time we witnessed a V-shaped recovery based on hopes that the BJP’s defeat in the state election will force the central government to move faster on reforms. The Nifty closed at 8,805, up 1.63 percent for the week.
A broker monitors share prices while trading at a brokerage firm in Mumbai

International news flows also helped stocks. Leaders of Russia, Ukraine, France and Germany agreed on a ceasefire agreement for eastern Ukraine. Meanwhile, Germany logged a better-than-expected growth in the last quarter of 2014 driven by domestic consumption, thus helping the euro zone’s performance. On the other hand, the Greek crisis continues to haunt the euro zone as the new government tries to convince international creditors to accept its terms. The crucial meeting on Monday (Feb.16) will possibly provide a direction as the bailout plan is set to expire by the end of this month.

On the corporate front, quarterly results continued to be mixed, with heavyweights like L&T, BHEL and Tata Steel disappointing the markets, while State Bank of India surprised the street with better fee income and improving asset quality at a time when most other PSU banks are faring dismally.

SpiceJet continued to launch fresh fire sales while markets still await concrete investments from a “strategic investor”. Jet Airways, which had a dream run in the past few months, corrected on the back of fare wars and rising crude prices. Tyre stocks such as Apollo and Ceat corrected after a tepid show despite an advantage in rubber prices. With most of the quarterly results declared, it is clear that the December quarter was among the worst in terms of growth and profits in the last few quarters. The markets seem to be ignoring the past and looking ahead at the budget, which will be tabled in the Lok Sabha on Feb. 28.

A man exchanging damaged Indian currency counts 100 rupee notes along a roadside in KolkataThe new consumer price index was released for January 2015, which was better than expected at 5.11 percent. The Index of Industrial Production (IIP) slowed down to 1.7 percent in December from 3.9 percent in November. FIIs turned net sellers for the week to the extent of $300 million while domestic funds continued to be net buyers of approximately $200 million.

Coal mine auction has taken off with GMR Group and Anil Ambani-led Reliance Cement bagging one mine each in Odisha and Madhya Pradesh respectively. Other allotments may be announced on Monday. The smooth completion of coal block allocations would be one of the reasons for improved sentiment on Monday.

Looking at the market’s momentum and ability to filter out adverse news to concentrate on the positives, I believe that we are firmly entrenched in a pre-budget rally. We could attempt the psychological figure of 9,000 for the Nifty and 30,000 for the BSE Sensex before the budget. But we should also remember that markets are no longer cheap, especially in the backdrop of worsening corporate performance.

The budget seems to be the critical factor for continued bullishness and the event has to far exceed expectations to keep the momentum going. That would be a tall task, given the constraints of maintaining fiscal deficit targets while increasing spending to kick-start the economy.

Ride the rally but remember that sentiments are fickle. The reality on the ground seems completely misaligned with market sentiment, unless the budget is successful in changing that. And I sincerely hope it does, as India may not get another chance in the foreseeable future.

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