Markets Weekahead: Don’t get swayed by the small-cap rally

April 12, 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 MumbaiMarkets continued their gains with the Nifty rising 2.22 percent for the week to end at 8,780. The highlights came from the BSE small- and the mid-cap indexes, with the former jumping 6.28 percent and the later adding 3.19 percent.

Brushing aside the monetary policy disappointment, markets continued to ride on Moody’s “positive” outlook of the Indian economy. Strong performers include the real estate sector post the cabinet’s clearance of the Real Estate (Regulation and Development) Bill and metal stocks, which rode the “value” theme as lead and zinc rose to a multi-month high.

The Index of Industrial production (IIP) surpassed expectations by growing 5 percent in February. This is the highest growth since October 2012 and would have a positive bearing on the markets on Monday. Meanwhile, the HSBC PMI Services data revealed a minor downtick. Data released by CMIE suggests increase in capital investment announcements by nearly 80 percent, but one needs to see whether they are converted to projects on the ground. Inflation data is expected early next week and benign numbers could prod the rally to continue a while longer. The worry seems to be on food inflation despite lower farm gate prices.

Important international data points would be China’s GDP data and the ECB’s monetary policy meeting on euro zone interest rates, which could have a bearing on international markets.

FIIs continued to be net buyers of $200 million for the week. The share sale in Rural Electrification Corporation (REC), which was oversubscribed more than five times, should provide a booster for the government’s divestment programme. Inox Wind’s IPO too got to a stunning listing with 38 percent gains. This goes to prove that despite a sluggish primary market, quality issues at the right price attract overwhelming demand.

The results season has kicked off with mid-caps such as Bajaj Corporation, Kitex Garments and CMC announcing results. Important results next week would be ACC, DCB Bank, IndusInd Bank, LIC Housing, Gruh Finance, TCS, Mindtree, Crisil and Reliance Industries. While private sector banks are expected to perform well along with housing finance companies, the technology sector could report mixed numbers due to cross currency headwinds. Reliance Industries is expected to report better refining margins consequent to lower inventory losses.

On the crude oil front, prices have not made as much news as the new oil find near Gatwick Airport, touted to be the largest onshore discovery in the UK in the last 30 years. Closer home, reports suggest Reliance’s recent gas discovery in the MJ-1 field of the KG-D6 basin may hold 1.4 trillion cubic feet of gas. Reliance’s stock outperformed after two months to close at 904, about 8 percent higher for the week.Undated handout photo of  India's Reliance Industries KG-D6's FPSO vessel seen off the Bay of Bengal

We could see the last leg of the pull-back rally extending for a few more days, especially with small- and mid-caps continuing to outperform.

The Narendra Modi-led government will complete a year in May, and a study of its achievements so far would probably reveal tardy progress as compared to expectations when it came to power. Though sentiment continues to be hopeful, serious money will await implementation. This is also reflected in Moody’s decision to hold ratings despite a positive outlook.

The market rally of the last fortnight is a great opportunity for investors to book profits as the corporate earnings season will not provide enough ammunition for markets to be re-rated.  The next big trigger would be the monsoon, which is still about two months away.

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