India Markets Weekahead: Buy into the consolidation

September 13, 2015

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

Markets displayed a spirited bounce-back after nearly four weeks of decline with the Nifty closing at 7,789, or 1.7 percent higher, on the back of supportive global cues and several reforms by the government.

PM Narendra Modi had an interaction on Tuesday with corporate leaders and assured them that India could withstand global turbulence and asked businesses to invest in India. This was followed by policy announcements on gold monetisation, spectrum trading by telecom companies, FDI in white labeled ATMs and a National Offshore Wind Energy Policy.

Global indices got a dose of optimism after China announced fresh stimulus measures by allocating additional funds to finance infrastructure projects, implement tax cuts for small businesses, and accelerate the use of the public-private-partnership model to stimulate economic growth. Also, comments from the Japanese prime minister that the government plans to reduce corporate tax rate by a cumulative 3.3 percentage points over two years helped global indices recover.

Steel stocks in India rose after the Director General of Safeguards recommended imposition of a provisional duty of 20 percent on steel products. S&P downgraded Brazil’s sovereign rating from investment grade to junk, which saw Indian companies with some exposure to Brazil in the line of fire. Overall, action during the week was stock-specific and traders stayed away from taking huge bets ahead of the upcoming Fed meet.

In the coming week, the U.S Fed meeting will be the single most important event for markets across the globe. I believe a rate hike will be deferred till the end of the year; but even if it happens now, markets may take it in their stride as the impending decision has been making the rounds for a long time. Irrespective of the Fed’s decision, there is going to be heightened volatility in global markets for almost every asset class.

Meanwhile, the Bank of Japan (BoJ) is widely expected to leave its policy rates unchanged on Tuesday. BoJ has been aggressively pumping stimulus into the economy, so far to no avail. China’s macroeconomic data – industrial production, retail sales and home sales data for August – will be announced on Sunday. Also, U.S industrial production data and euro zone inflation data for September are due in the coming week.

Back home, markets are expected to react positively to industrial production numbers for the month of July 2015, which came out on Friday after market hours. IIP beat estimates to grow by 4.2 percent, and the previous month’s figures have also been revised upwards at 4.4 percent. The government will also unveil WPI and CPI data for August 2015 in the coming week. The fortnightly fuel price review is also due, as is the second installment of advance tax for the current financial year, which will provide clues on Q2 FY16 corporate earnings.

Post the Fed meet, the focus will shift to the RBI’s monetary policy review on September 29 where I expect a minimum 25 bps rate cut. But don’t be surprised if the RBI governor doles out a 50 bps cut, which could be a big sentiment booster for the markets but may not do much to bolster the economy, which requires real demand to kick in.

The rate cut can act as a catalyst if the government can kick-start the beleaguered infrastructure sector, which will have a positive impact on other sectors which are dependent on it. Since the window for action is getting narrower, the government will likely be forced to act faster to take advantage of the global economic situation.

The Nifty managed to close in the support band of 7,750-7,800 and we should see a better start on Monday on the back of Friday’s IIP data. With several important events and macroeconomic data lined up in the coming week, it will be interesting to see if the Nifty can move towards the 8,000 mark. I believe the index has hit a bottom and will begin a phase of consolidation. I would advise investors to continue buying during this period.

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