India Markets Weekahead: Better safe than sorry

July 19, 2015

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

The Nifty extended gains by nearly 3 percent during the week and scaled past 8,600 for the first time since April. Global markets were also on a roll after Greece agreed to implement sweeping austerity measures demanded by lenders to open talks on a new multibillion-euro bailout package.

A steady rupee and declining crude oil prices aided sentiments in India. Global risk appetite returned to equity while gold prices continued to fall. FMCG stocks witnessed a lot of interest with the BSE FMCG Index gaining the most among sectoral indices, followed by banking, pharma, oil and gas, auto and IT.

The Seventh Pay Commission’s recommendations are likely to be submitted by October and could be implemented from July 2016. It is expected to raise the salaries of government employees, fueling hopes of a double-digit growth in passenger car sales in FY17.

The Union Cabinet approved clubbing of different categories of foreign investment in companies with a composite cap. However, the FII limit will stay at 49 percent for banks. On the macro front, consumer price index (CPI) accelerated to 5.4 percent in June 2015 from 5.01 percent in May 2015, driven by rising food price. Meanwhile, the wholesale price index (WPI) stood at -2.4 percent in June 2015 compared to -2.36 percent in May 2015. The huge gap between CPI and WPI is a pointer towards inefficiencies in the supply chain.

In the coming week, corporate earnings, developments in parliament and the progress of monsoon will be key drivers for the markets. Though we have entered the earnings season with low expectations, management commentary holds the key to determine trends in the respective sectors.

Results are expected from Reliance, Axis Bank, HDFC Bank, HUL, Infosys, Bajaj Auto, Biocon, GAIL, Lupin, CCL, LIC The Greek Parliament is seen behind flags displayed for sale during an anti-austerity rally organized by the country's biggest public sector union ADEDY in Athens, Greece July 15, 2015. REUTERS/Yannis BehrakisHousing, Ultratech, Asian Paints and Wipro.

Last week, the government reviewed the GST Bill clause by clause and reached a consensus on most issues including providing compensation to states. The monsoon session of parliament beginning Tuesday is expected to lead to volatility in the stock markets as political controversies are likely to disrupt proceedings and the passage of key bills, namely GST, land, labour and tax reforms.

The progress of monsoon has not been satisfactory so far. According to the India Meteorological Department, cumulative rainfall till date is 6 percent below the long-period average. Although kharif (summer crop) planting is up about 62 percent year-on-year, the quantum of rainfall this month is crucial to avert damage.

The Nifty has been resilient to global events so far and has been able to break the key resistance zone of 8,400-8,500. The domestic bulls have regained strength as can be seen from outperformance of mid- and small-cap stocks, which have rallied sharply between 15-25 percent in a short span of time.

Domestic money seems to be the driver currently and the momentum can take it further as recent profits act as confidence boosters. Liquidity need not necessarily be supported by fundamentals for the market to rise higher under such circumstances.

The passage of key bills in parliament and a pick-up in monsoon rains could act as market boosters but these are subjects of uncertainty. The Federal Reserve’s FOMC (Federal Open Market Committee) meet on July 28-29 may give clues to the possibility of a hike in U.S. interest rate. Closer home, RBI policy is due on August 4.

The markets are way ahead of fundamentals and a weak results season will prove this point in the days to come. A trader needs to go with the tide but as an investor, one needs to take a call. While I did not expect Nifty to reach these levels, I would utilize it to my advantage and book out part of my portfolio which has given me unexpected profits. The cash in the portfolio would have to wait longer to be deployed, but as the saying goes: “Better safe than sorry.”

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