India Markets Weekahead: Be greedy when others are fearful

August 23, 2015

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

Brokers trade on computer terminals at a stock brokerage firm in Mumbai

It was a week of contrasts with the Nifty trying to break above 8,500 levels during the first three days till cracks appeared on Thursday, which led to a sharp fall. Though the index recovered to about 8,300 from the lows of 8,235, there was an underlying fear that adverse international sentiments may have an overbearing effect on India’s markets.

Nervousness amid concerns of a slowdown in China and uncertainty around the timing of a rate hike by the U.S. Fed contributed to recent decline. On the domestic front, worries over deficient rainfall continue to keep traders and investors jittery with fears of a first drought in six years. Asset class across the board witnessed selling pressure except for gold, which is currently up 10 percent from its recent lows.

Chinese manufacturing activity shrank for a sixth straight month in August. The Caixin/Markit flash PMI dropped to 47.1 in August from July’s reading of 47.8. Investors continued to absorb the minutes from the FOMC’s July meeting wherein the Fed offered no clear indications on an imminent rate hike. The dovish reading means the rate hike may not come at its most discussed date in September but could likely be in December or early next year.

NYMEX crude oil prices traded below $40 a barrel for the first time since the 2009 financial crisis on signs of U.S. oversupply and weak Chinese manufacturing. Low oil prices are expected to benefit India as it imports more than two-thirds of its requirement. It will also benefit corporates having crude or its derivatives as key raw material. The last quarter results showed margin improvements but if consumer demand doesn’t pick up, most of those margin gains may need to be passed on, though with a lag effect.

Metal stocks continued its decline as prices crashed globally on ongoing China concerns. Vedanta has decided to close down its rolled product business due to a steep fall in aluminum prices globally, negative margins and huge imports. A worker operates a furnace at a steel manufacturing plant in Hefei, Anhui province November 23, 2011. REUTERS/Stringer

Meanwhile, global credit rating agency Moody’s Investors Service cut its forecast for India’s economic expansion for the current fiscal year to 7 percent from its previous forecast of 7.5 percent due to drier-than-usual weather conditions.

A number of mid-cap stocks turned extremely weak, with a few of them like Kaveri Seeds and Amtek Auto falling due to specific news flows while others fell in tandem as large individual investors seem to have been unwinding.

In another key development, the IMF extended its basket of reserve currencies to Sept. 30, 2016, providing another setback to the already weak Yuan. Though China’s central bank has said it will not devalue the currency further in the near future, markets are skeptical.

Sharp cuts in the global and U.S. stock indices on Friday point to a gap down opening once again on Monday. The coming week also marks the expiry of derivative contracts, which is expected to keep volatility high. There has been no support for the markets from domestic news flows, nor any indication of a special parliament session to take up the GST bill.

I had advised last week that we could see further pressure if expectations are not met. However, in a desperate attempt to soothe investors’ frayed nerves, it is possible that the government may accept the recommendations of the AP Shah committee to waive retrospective imposition of the controversial minimum alternate tax (MAT) on foreign portfolio investors.

An employee counts rupee notes at a cash counter inside a bank in Mumbai. REUTERS/Rupak de Chowdhuri/FilesRupee movement will be closely watched, and the RBI may have to reluctantly step in to support any sharp fall of the currency. Though the offer for sale of Dredging Corporation was successful, we should remember that it was miniscule compared to the upcoming IOC share offering, which is expected to bring in 93.96 billion rupees ($1.4 billion) for the government. This could be an acid test in view of the adverse market conditions expected on Monday. One also needs to see the outcome of the three IPOs slated for next week – Pennar Engineered Building Systems, Shree Pushkar Chemicals & Fertilisers and Logistics firm Navkar Corporation.

I have been asserting time and again that the global and domestic situations are not conducive for investors as it is more of a traders market with range trading becoming more and more predictable. However, we now need to see whether the range is broken on the downside and the Nifty reaches 8,000.

The clamour for a rate cut before RBI’s next policy meet may get louder, but even if the central bank obliges, it may not help sustain the markets beyond a point. It’s time for long-term investors to slowly nibble in. Remember Warren Buffett’s famous quote: “Be greedy when others are fearful.”

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/