Markets Weekahead: Prepare for rainy days

May 17, 2015

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

Indian markets ended in the green for a second week, with the Nifty up about 0.80 percent, in line with global markets. Volatility continued to be the highlight but the bulls eventually triumphed with a stable positive close on Friday.

The Nifty saw an intermediate bottom at around 8,000 the previous week and we are in the midst of a bounce-back. FIIs continued to be net sellers to the tune of $173 million, but the rupee recovered to 63.50 against the dollar.

A broker monitors share prices while trading at a brokerage firm in MumbaiChinese markets were the best performers due to a benchmark rate cut of 25 bps, while European markets lost steam due to concerns about Germany’s economy.  Weak industrial output and consumer sentiment continued to bother U.S. investors but the markets managed to close marginally in the green.

Closer home, the macro data, especially industrial production, was a matter of concern. Though consumer inflation was benign at 4.87 percent, the wholesale price index (WPI) indicated a deflationary trend at -2.65 percent due to the oil effect. This has raised hopes of a rate cut by the Reserve Bank of India on June 3.

Passenger car sales grew a surprising 18+ percent whereas the two-wheeler segment fell 2.77 percent due to weak rural demand. Demand for passenger cars was high at the entry level and possibly in the tourist and taxi segment. Sustainability of this double-digit growth is suspect unless we witness an economic turnaround.

The earnings season continued to be mixed. Pharma majors Lupin and Dr. Reddy’s disappointed but the stocks had a spirited bounce-back. Tata Steel declared a non-cash writedown of about 50 billion rupees ($785.3 million) with regard to overseas assets. This could be the precursor to a sell-off in those assets.

The surprise movers were PSU banks, which bounced back following a deep correction after results indicated stable asset quality, especially for Bank of Baroda and Oriental Bank of Commerce. Union Bank’s bottom line was also better than expected.

Jubilant Foodworks surprised the market after many quarters, posting a healthy 26+ percent growth in net profit. Lower base effect as well as lower food inflation helped improve its margins.

A cashier counts Indian rupee currency notes inside a bank in MumbaiThe government’s divestment plan continues, with proposed stake sales in NTPC and IOC expected to garner $2.17 billion. If the markets turn lackluster again, attracting genuine institutional interest could be difficult.

The NDA government led by Prime Minister Narendra Modi is completing a year in office. It’s achievements on the domestic front seem many shades lighter than what the markets had expected. Even on the policy front, the government failed to push through key reform bills in the extended parliament session. The clamour of dissenting voices both from within and outside is getting louder, and this will hopefully lead to introspection and action to kickstart the economy.

In the midst of continued uncertainty on the MAT issue, overall slowdown of the economy and earnings, large brokerages have started downgrading India, prominent among them being HSBC, which has assigned an “underweight” rating.

I believe a positive review would happen only when investors notice activity at the ground level reflected in the macro numbers and earnings. The first trigger for such a review could be led by a normal monsoon and a push on infrastructure spending.

Crude oil, which played a prominent role in bringing down inflation and subsidy burden in the last few months, has rallied sharply. This could be one of the impediments to growth.

I believe the present rally is purely part of a bounce-back post a steep correction. It could last a few days or a week but the Nifty could find it difficult to cross 8,350-8,400. The correction from here on could be slow and painful. I would continue getting into cash for the rainy days ahead.

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