India Markets Weekahead: Correction on the cards

August 9, 2015

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

Markets remained flattish throughout the week in the absence of any trigger after the RBI maintained status quo on repo rates, with the Nifty ending up around 0.4 percent at 8,564.

Markets shrugged off the IMD’s latest forecast of “deficient” monsoon in August and September due to a strengthening of the El Nino phenomenon. Base metal prices declined globally on slowdown concerns in China while Brent crude prices fell 8 percent during the week. Overall, the week was lacklustre with corporate results being the highlight.

The RBI has cut the repo rate by 75 basis points so far this year, but that has not led to any pickup in credit growth. Consequently, credit offtake in FY15 grew at the slowest pace in 17 years. Past experiences have shown that the RBI’s monetary policy alone cannot be the driver for economic growth. Instead, it is the government’s initiative to spend on infrastructure which could start a new economic cycle. A rate cut could act as a catalyst when we witness an economic revival.

The Manufacturing PMI for July rose to 52.7, indicating that the mood is getting better, but I would wait for hard numbers as we have recently witnessed a mismatch between market sentiment and the ground reality.

PSU banks gained after the government announced further capital infusion, but I still believe NPAs will continue to haunt them for the next few quarters unless we see an economic pickup.

Select mid-cap stocks like Cummins India, KEI Industries and Vardhman Textiles, whose earnings surprised on the upside, saw significant buying. Bharti Airtel’s earnings were aided by exceptional income, but the company’s launch of 4G mobile services didn’t create any waves as investors are worried about Reliance Jio, which is preparing to start offering 4G services in December.

The upcoming week marks the reporting of the last tranche of corporate earnings. Some of the key results are Divis Laboratories, Jaiprakash Associates, Wockhardt, Engineers India, Adani Power, Tata Steel, Sun Pharma, State Bank of India, Bosch, Coal India, Ashok Leyland, Aurobindo Pharma, Voltas, Jubilant FoodWorks, Page Industries, Tata Power, BPCL, Hindalco and SAIL.

The U.S. labour market report showed that the number of full-time jobs as a share of total employment rose 81.7 percent, the highest level since November 2008. Non-farm payrolls increased 215,000 last month against expectations of 223,000, but the unemployment rate held at a seven-year low of 5.3 percent. This has raised expectations of a September rate increase by the Fed.

Global economic data expected in the coming week include China’s industrial production figures for July 2015, U.S. retail sales data for July 2015, Germany’s second quarter GDP numbers and the euro zone’s CPI data for July 2015.

Meanwhile, the logjam in India’s parliament continues and hopes of passage of key bills including GST before the session ends on August 13 have diminished. Markets are now focusing on corporate earnings for further market cues. Prime Minister Narendra Modi’s Independence Day speech will also be keenly watched. The next big political event would be the Bihar elections, which is still a couple of months away.

Markets are in a phase of consolidation and are due for a correction. Though there are a few opportunities, the risk-reward ratio in most mid-caps and some large-caps are not conducive for a long trade. It’s time to be fearful and not be greedy. Keep taking profits off the table wherever valuations seem to be stretched.

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