India Markets Weekahead: Time to wait and watch

July 4, 2015

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

The Nifty rallied to close at 8,485 on Friday, its highest point in more than six weeks. The Greek debt crisis took center stage as the country became the first developed nation to default on a loan with the IMF. A worsening on the situation there could have a domino effect around the world.

A broker reacts while trading at his computer terminal at a stock brokerage firm in MumbaiBut there is a growing feeling that irrespective of what happens to Greece, India would remain fairly insulated.

Greeks will vote in a referendum on Sunday to decide on whether to accept creditors’ bailout conditions. The country also needs to pay the ECB more than 3 billion euros on July 20 to redeem bonds held by the central bank. The IMF has also published a gloomy analysis of Greece’s debt burden, which could influence the referendum to reject bailout terms.

Chinese markets continued to correct despite a rate cut last week. The slowdown in China is taking its toll on the metals sector, with most of the frontline stocks closer to yearly lows.

India’s macro economic data brought some cheer as May 2015 core sector grew by 4.4 percent against declines in the previous two months. Growth was mainly led by an uptick in the cement and steel sector, indicating a pickup in construction activity. The recovery in core sectors suggests that the overall industrial growth could post a growth of 4 percent. However, the Services PMI declined to 47.7, which is the lowest since April 2014 and being a dominant sector, this could have an effect on overall growth going ahead. Fitch too trimmed its economic growth projections for India to 7.8 percent from 8 percent for FY16.

Oil marketing companies were in focus as crude corrected further. IT stocks saw selling pressure during the week on lower revenue growth forecast for Q1 of FY16. According to Gartner, a rising dollar is expected to lead to a 5.5 percent decline in worldwide IT spends. A few companies such as Tech Mahindra, Persistent and KPIT have already issued earnings warning.

Auto numbers also disappointed to a large extent with listed players showing a slowdown in both passenger cars as well as two wheelers, with the exception of Bajaj Auto and Eicher Motors . Rural demand has slowed down, which could dent growth prospects for FMCG companies. Monsoon, after a promising start, seems to be playing truant due to a possible El Nino impact. The last few days have been drier and IMD’s reiteration of 88 percent of normal rainfall should worry markets going ahead.

People walk out of the Bombay Stock Exchange (BSE) building in MumbaiMutual Funds are flush with funds and domestic liquidity seems to be the driving factor behind the markets’ rally, making up for recent selling by FIIs. The flush of IPOs expected over the next few months would also have a bearing on the markets. Historically, mega IPO lineups have ensured buoyancy in stock markets.

On the flipside, the slowdown in monsoon along with the building up of political heat, which could derail the monsoon session of parliament, is a cause for worry. The earnings season may not give much reason to cheer for investors, except for a few sectors including oil and gas, power ancillaries and pharma.

The coming week could start on a more decisive note as a result of the referendum in Greece. A positive development in Greece could give us a temporary rally for the next few days but domestic factors would play out in a longer time frame.

It would be futile to guess what will happen to Greece. Therefore, I would prefer to wait and watch. The four shaky pillars of the markets currently are Greece, monsoon, earnings and domestic politics. The next few weeks will decide how many of them support the markets or give way.

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