India Markets Weekahead: Time to cherry pick as markets react to Bihar

November 8, 2015

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

The election result in Bihar would influence investors in the coming week. Voters have given a clear mandate to the “Mahagathbandhan” partnership of the Janata Dal (United), Rashtriya Janata Dal and Congress against Prime Minister Narendra Modi’s National Democratic Alliance. Market expectations of Modi’s alliance winning in Bihar were tapering over the last few days and exit polls also pointed towards a tightly fought election — but a rout had not been expected. A gap down opening on Monday is foretold.

Nitish Kumar (L), a leader of the Janata Dal (United) , and Lalu Prasad Yadav, chief of Rashtriya Janata Dal, gesture after addressing a news conference in Patna, November 8, 2015. REUTERS/Stringer

Last week, the benchmark indices extended their losses for a second consecutive week as unabated selling pressure ahead of election results and weak corporate earnings kept the market on tenterhooks. The rupee was also hit, and hovered around 66 rupees against the dollar. The trend in Indian markets was sharply divergent from global peers, which are logging gains week after week. For the week, FIIs were net sellers to the tune of 10.85 billion rupees, while DIIs bought shares worth 9.68 billion rupees.

Automobile numbers for the month of October were on expected lines as the festive season brought in cheer for the domestic automobile industry with strong double-digit growth. The domestic passenger vehicle segment grew by more than 20 percent in October and clocked its third highest monthly volume, led mainly by new launches. Two-wheelers, with the exception of Bajaj Auto, also reported double-digit growth in volume. However, this high growth needs to be adjusted for a festive season that began late as compared to last year. The industry has grown at 8-10 percent adjusted for seasonality.

Corporate results were mostly dismal. GAIL, Tata Motors, Sun Pharma, Reliance Communication, and Cipla were among those reporting weak results. Tata Motors booked about 25 billion rupees of losses after the blasts at Tianjin port in August. However, banking major SBI reported a decent Q2 performance with acceleration in loan growth, stable NIMs and improvement in NPL levels. Other corporates that reported better-than-expected results included Eicher Motors, M&M, ONGC, and Tata Steel.

Pharma stocks saw heavy selling pressure amid a weak Q2 performance. Dr. Reddy’s Laboratories crashed by 15 percent after the U.S. FDA warned the company over inadequate quality controls.

An employee writes on a register inside the Tata Motors car showroom in Ahmedabad, November 6, 2015. REUTERS/Amit Dave

Power sector stocks along with banking stocks were in focus after the Cabinet approved a new scheme that provides for the revival of power discoms. The government also announced the launch of a gold monetisation scheme. A Swachh Bharat cess of 0.5 percent on all services was imposed with effect from Nov. 15. Excise duty on petrol and diesel was increased for the nth time, but oil marketing companies would absorb the same without any change in retail prices.

Investors will closely track the final batch of Q2 FY16 results in the coming week. Britannia Industries, BPCL, HPCL, Hindalco, and Coal India are some of the key corporates lined up. Tata Motors will react to weak Q2 numbers on Monday.

Key macroeconomic data expected this week is the CPI for October and industrial production data for September on Thursday. On the global macro front, China is set to release its October industrial production data on Wednesday. Meanwhile, a crucial U.S. jobs report came in stronger, bolstering a case for a December interest rate hike by the U.S. Federal Reserve.

A man looks at a screen across a road displaying the Sensex on the facade of the Bombay Stock Exchange (BSE) building June 29, 2015. REUTERS/Danish Siddiqui/Files

The coming week is truncated due to Diwali and the Bihar assembly election results will be the single most important factor. The markets would open gap down but a strong support around the 7750-7800 Nifty band would need to be watched. I believe the rout in Bihar could trigger a bigger change within the NDA and could force the government to focus on reforms and development plans which need not pass through parliament. The mood may also change to being more accommodative.

Overall, I expect the development agenda to take centrestage and I see next week’s fall as an opportunity to build a long-term portfolio. The agony could continue for a couple of weeks as the doomsday sayers would be louder than ever, but it’s time to cherry-pick once again.

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