India Markets Weekahead: Build your portfolio as markets consolidate

October 4, 2015

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

The Nifty closed a percent higher to end the truncated week at 7,951 after threatening to fall below crucial support levels prior to the Reserve Bank of India’s monetary policy review. The bigger-than-expected 50 bps repo rate cut surprised markets, resulting in a robust pull-back.

RBI Governor Raghuram Rajan indicated that the central bank would pursue an accommodative stance while highlighting the need for a faster transmission of rate cuts by banks. Some banks were quick to pass on the benefits to consumers this time, led by PNB, BoB, IDBI Bank, ICICI Bank, Yes Bank, Kotak and Axis Bank. Further rate action will be data dependent, though I expect a cut of another 50 bps during H2 FY16.

FII and DII activities were muted during the week. For whole of September, FIIs withdrew $865 million from Indian equities while DIIs infused $1.31 billion.

The RBI also decided to lower risk weightage on low-cost housing loans to 50 percent. This will increase the affordability of budget housing, in turn benefitting the banking sector and housing finance companies. But I wonder how many of the listed entities will benefit as most of the low-cost housing finance companies in the micro sector are unlisted.

Macro economic data released during the week included the Nikkei India Manufacturing Purchasing Managers’ Index (PMI), which fell to a seven-month low of 51.2 in September 2015 from 52.3 in August 2015. The output of eight core industries (38 percent weightage in IIP) registered a growth of 2.6 percent year-on-year in August 2015.

In stock specific news, HCL Technologies yet again issued a profit warning which resulted in the stock tanking 10 percent and creating a negative sentiment for the IT pack. IDFC, which received a banking license, plunged after the company’s demerger into two entities. The newly created IDFC Bank is expected to start with a loan book of 550 billion rupees, and will focus on rural banking – 15 out of its first 23 branches will be in rural Madhya Pradesh.

Auto numbers for September 2015 were subdued with Maruti reporting a marginal 3.7 percent volume growth while exports recorded a sharp fall of 26.6 percent. Mahindra and Mahindra saw sales fall by 5 percent and Tata Motors remained flat. The two-wheeler industry too struggled with Hero MotoCorp and Honda Motorcycles & Scooters India showing disappointing sales. Eicher was an exception, with better sales both in the CV and two-wheeler segment.

Going forward, demand for vehicles could increase due to cut in interest rates, new launches and the upcoming festive season. Maruti seems to have found a formidable competition in Renault’s Kwid, which is priced to hit Maruti where it hurts the most – the entry-level segment. I will not be surprised if Kwid does to Maruti what Duster did to Mahindra.

In the upcoming week, events like euro zone retail sales data, U.S. ISM non-manufacturing composite and minutes of the FOMC’s recent meeting are expected to give some direction to markets. Locally, the Nikkei India Services PMI for September 2015 is due. Also, the trend in investment activity of FIIs and movement in global markets will determine near-term movement on the domestic bourses.

The year 2015 could be a watershed for emerging markets as it could be the first time since 1988 that we witness net outflows, estimated at about $541 billion. The U.S. Treasury would have reached its borrowing limit of $18.1 trillion by November 5 and would need Congress to vote to raise the limit. In the meantime, we may hear various voices of caution, which could have a temporary effect on global markets. Back home, the Bihar election will start On October 12 and will be spread over five phases till November 5. The results would be declared on November 8.

With major events out of the way, the next trigger will be the Q2 FY16 earnings season which is expected to kick off next week. The Nifty has once again taken support at the 7,700-7,750 levels and is currently near the crucial resistance level of 8,000-8,050.

For the past two months, the index has been unable to break the 8,100 mark, so it remains to be seen whether it will be able to do so during October, a historically bearish month. The downside is limited and we should see the Nifty consolidating in the range of 7,750 to 8,100. I would advise investors to continue building their equity portfolio by utilising market volatility as an opportunity.

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