India Markets Weekahead: Testing times ahead as fear engulfs markets

September 6, 2015

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

A broker reacts while trading at his computer terminal at a stock brokerage firm in Mumbai, India, August 24, 2015. REUTERS/Danish Siddiqui Markets had their worst weekly fall in about four years with the Nifty closing at a 13-month low of 7,655 amid weak global cues and disappointing domestic data. Even the government’s decision to waive retrospective imposition of a minimum alternative tax (MAT) affecting foreign funds failed to lift investor sentiments. Foreign portfolio investors continued to sell heavily, resulting in net outflow of $470 million.

On the macro front, India’s Q1 FY16 GDP grew at a lower-than-expected rate of 7 percent from 7.5 percent in the previous quarter, while the Nikkei India Manufacturing Purchasing Managers’ Index (PMI) fell to 52.3 in August 2015 from July’s six-month high reading of 52.7. In China, the final Caixin/Markit manufacturing PMI slipped to 47.3 in August, the lowest reading since March 2009.

Looking at sectors, the August automobile sale numbers were weak, resulting in a sharp fall for some auto companies including M&M, Maruti, Tata Motors and Hero MotoCorp. The banking sector witnessed further cuts after the central bank named ICICI Bank and State Bank of India as “systemically important” banks, lining the lenders up for tougher supervision. The designation suggests the RBI is worried about their asset quality. The central bank also issued a draft formula for banks to compute their base rate, spooking private lenders as they could witness margin pressure if the proposal is implemented. Defensive stocks in the pharma and technology space that have fared comparatively well so far succumbed to selling pressure during the week.

In Europe, the ECB reported lower forecasts for both inflation and GDP in the euro zone. In the UK, all three key sectors – services, manufacturing and construction – saw weaker than expected PMIs.

In the upcoming week, markets are expected to react to a mixed U.S jobs data that failed to provide a clear signal on when the Fed will raise interest rate for the first time in nearly a decade. The Chinese markets, which were shut over an extended weekend, could open gap down on Monday adding to further selling pressure across the globe.

Macro-economic data expected in the upcoming week include China trade balance figures and inflation numbers. Back home, index of industrial production (IIP) data for July 2015, Q2 current account balance and August trade balance data are expected.

With a nearly 4.5 percent fall during the week, Nifty has broken the recent panic lows of 7,667. There is a lack of follow-through buying at the lower levels with market participants taking advantage of intermediate bounces to reduce their long positions. It’s a “sell on rise” market and bounce-backs are sharp but short, indicating that the pain will probably continue for a while.

I have been reiterating time and again that India is in a “sweet spot” but the government needs to act immediately to take advantage of the global situation as the window is getting narrower.An investor stands in front of an electronic board showing stock information at a brokerage house in Shanghai, China, September 2, 2015. REUTERS/China Daily

Though I have been advising buys on various dips, it is getting increasingly riskier to commit a lump sum on large dips as the liquidity factor supporting markets could become elusive as stocks sink lower. A staggered systematic approach to investing would work well.

The SGX Nifty indicates we should get closer to 7,550 on Monday. It remains to be seen if the index manages to hold on to the 7,500-7,550 band, which is a major psychological support. I would continue nibbling in at every fall as the current weakness is due to international factors and not due to any structural issues in India. It could be an endurance test of one’s ability to absorb the pain and having the courage to invest more.

In a scenario like the one we are experiencing now – when uncertainties abound and sentiment is low, it is easy for investors to be overwhelmed. Most of us stop thinking rationally and get carried away with the herd. Playing the markets is a game of psychology and this is the time to display one’s mental strength, which will separate the men from the boys in the coming days.

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