India Weekahead: Time for a stock picker’s market

March 22, 2015

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

The Nifty continued its losing streak, falling 1.03 percent during the week to end at 8,570. The present market behaviour is in stark contrast to what we had witnessed in the last 12 months. Intraday rallies are being sold into and positive news flow is unable to sustain the markets at higher levels.

The Fed’s dovish message should have been a trigger but the effect didn’t last beyond a few hours. Lower-than-expected inflation (WPI) data and the finance minister’s statement that CAD should be below 1 percent in 2015-16 too failed to enthuse markets.

One of the factors contributing to this weakness could be year-end considerations, including taxation. Also, unseasonal rains have caused extensive damage to farm produce and there is fear that government measures including possible loan waivers could be viewed negatively by international investors.

The budget session of parliament has been the most productive in a decade, with most of the important bills passed except for the Land Acquisition Bill. The government also tabled a bill to deal with ‘black money’, which could prove to be a revenue-generating masterstroke. In addition to collection of hefty penalties, the bill could pave the way for better tax compliance.  The VDIS (voluntary disclosure of income scheme) of 1997 yielded 100 billion rupees for the government and I believe the ‘black money’ bill could yield many times more.

The upcoming results for March quarter could be weaker than the earlier December quarter and could spook markets further. Some of the bellwether IT names including TCS have a cautious outlook. The IIP data for January and manufacturing PMI for February also indicate that the slowdown in manufacturing continues. Exports also dipped by 15 percent in February but imports led by oil declined a tad more, thus narrowing the trade deficit.

The divestment plan for NTPC, BHEL and a few other PSU stocks along with a slew of rights issues could suck out liquidity in the short term. As Indian markets begin to underperform their global peers, it could lead to a withdrawal of funds from the country, especially by ETFs and hedge funds.

Jindal Steel and Power (JSPL) and Balco lost mines after the government rejected winning bids for four of 33 coal mines put up for auction. JSPL could sink to sub 150-rupee levels as these mines were critical to its operations. Inox Wind’s IPO was oversubscribed 18 times, while Adlabs barely managed to scrape through despite a substantial reduction in its IPO price. This again proves that investors have turned more discerning.

There will not be many triggers in the foreseeable future other than corporate results. The next big trigger could be monsoon, which is expected to be normal this year.  As markets drift, they will tire out investors and fence-sitters will prefer to wait a while longer. The volatility leading to a whipsaw market movement has made it difficult for traders too. The period of easy money seems to be over and it could soon turn into a stock picker’s market.

The Nifty will be rangebound over the next few weeks, drifting towards 8,400. A break below that will open up the 7,800-8,400 range, which would be a buying opportunity for those who missed the rally in the past year. We could be witnessing a phase of consolidation before the government’s efforts of the past few months start yielding visible results. I would continue to focus on sectors that contribute to ‘building India’ while reducing weightage in IT and Pharma.

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