Markets Weekahead: Lighten positions, hold cash for opportunities

April 5, 2015

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

A spirited rally during the truncated week saw the Nifty gaining 2.83 percent to close at 8,586. The question on everybody’s mind is whether the markets are back on track or is it a temporary bounce before we witness lower levels in the coming weeks?

A broker laughs while speaking to a colleague, as they trade on their computer terminals at a stock brokerage firm in MumbaiAs the geopolitical risk in Yemen ebbed, the effect of dovish Fed statements played out with institutional investors becoming net buyers. Sectors like banks, pharma and realty bounced back, while the IT sector turned weak due to profit warning as well as fears that cross currency headwinds could prune margins. The earnings season will start in the next few days but IT bell weather Infosys would be declaring its results on April 24 in a departure from the norm.

Iran’s nuclear deal with world powers would benefit India in the long run as it continues to be the second biggest buyer of crude from Tehran after China. Oil prices are expected to remain subdued unless Yemen provides a reason for a spike. The Greece loan tranche due on April 9 would be closely watched, and failure to make payments could take Greece a step closer to an exit from the euro zone.

Telecom stocks were outperformers despite high bidding prices for spectrum as analysts are expecting tariffs to rise by up to 15 percent in the next few months. I wonder how higher tariffs can be sustained in view of disruptive pricing expected with the launch of Reliance Jio? The silver lining could be a policy favouring spectrum sharing and guidelines for trading, which is a much-awaited reform in the sector.

The recent announcement of concessions for gas-based power plants to operate at 30 percent load factor is seen as an effort to ensure that loans availed by these entities do not become NPAs (non-performing assets). The “Make in India” story will play out only if sufficient power is made available to the manufacturing sector, which would mean creating a viable business environment to increase the load factor for existing power plants.

The important events and data to watch in the upcoming week would be the RBI monetary policy decision on April 7 and Index of Industrial Production (IIP) data on April 10. I believe there will not be any major changes in the monetary policy except maybe a slight tinkering of the CRR. Prime Minister Narendra Modi gestures to Reserve Bank of India (RBI) Governor Raghuram Rajan at an event on financial inclusion in Mumbai

The core sector growth slowed down to 1.4 percent in February 2015 and we are yet to notice a pick-up in manufacturing activity. I also don’t expect any positive cues from IIP data. The March auto sales data too continued to disappoint with industry leader Maruti’s sales declining by 1.6 percent. Except for the commercial vehicle segment, others showed a weak trend which is expected to continue for the next few months.

Markets will enter into a phase of consolidation with a negative bias as the earnings season unfolds. There may not be too many positive triggers for the markets to resume the upward trajectory, especially when economic recovery still seems a few quarters away. Utilise this period to lighten positions and hold cash for opportunities which will unfold over the next few weeks. The extended sentiment-based rally seems to be over and markets will now await concrete data – economic as well as corporate earnings – for the next leg of rally to resume.

I am still hopeful that measures taken by the Narendra Modi government will yield results, albeit with a lag. The external environment is conducive for India to achieve its objectives of becoming a manufacturing hub and a favoured investment destination, but we may not have the luxury of time. Investors would watch for delivery of the government’s promises and results at the ground level.

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