India Markets Weekahead: We’ve reached the bottom, time to go long

November 22, 2015

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

A man looks at a screen across a road displaying the Sensex on the facade of the Bombay Stock Exchange (BSE) building in Mumbai, India, June 29, 2015. Indian shares fell more than 2 percent on Monday, heading for their biggest daily decline in nearly a month as Greece looked set to default on its debt repayment this week, sparking concerns about foreign selling in emerging markets. REUTERS/Danish Siddiqui - RTX1I8E4

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

Markets recorded their first weekly gain in four, with the Nifty ending up 1.25 percent at 7,856. After the index almost went below the crucial band of 7,750-7,800, we witnessed a spirited recovery beyond 7,900 levels helped by short covering as well as value buying.

Just as I predicted in my earlier notes, the government is on a reform overdrive post the Bihar debacle, announcing a series of policy measures to ensure that investor confidence is restored and the economy bounces back. For the week, FIIs were net sellers to the tune of 27 billion rupees while DIIs continued to play contra with a net buying of 30 billion rupees. The rupee remained stable, ending at 66 against the dollar.

The cabinet allowed the roads ministry to consider extending toll collections, which is expected to benefit 34 stalled road projects. The government announced a 3 percent interest subsidy scheme for exporters, a direct subsidy to farmers for sugarcane, proposed to free natural gas pricing, and recommended an Open Acreage Licensing Policy (OALP). The Cabinet Committee on Economic Affairs (CCEA) approved various projects worth 96 billion rupees, gave clearance for a further 10 percent stake sale in Coal India, and announced the IPO plan for Cochin Shipyard. This should yield another 210 billion rupees subject to market conditions.

Minutes from the U.S. Federal Reserve meeting showed most officials anticipated economic conditions to be strong enough for a nominal rate hike in December. This led to a rally in equities across the globe. I expect markets to rally post the rate hike too as it will end a period of uncertainty.

In sector-specific action, consumer-related stocks remained in the limelight after the Seventh Central Pay Commission recommended a hefty 23.55 percent hike in salary, allowances and pension for 4.8 million government employees and 5.5 million pensioners. The total financial impact would be around 1.02 trillion rupees during FY 2016-17. Fitch is of the view that the pay hike could challenge the government’s goal of achieving a fiscal deficit of 3.5 percent in the year ending March 2017 unless India can cut spending or raise revenues. Cutting spending is not a plausible goal but the government could aim to raise revenues. The economy’s revival could help in incremental revenues and a healthy capital market could help the government meet the divestment targets and more.

On the macro economic front, merchandise exports continued to decline for the eleventh straight month at 17.5 percent year-on-year to $21.35 billion in October 2015. This also puts the NDA’s “Make in India” programme under the scanner. I expect steps in this regard to revive exports. Meanwhile, merchandise imports also dipped 21.2 percent to $31.12 billion. The trade deficit narrowed by 28.1 percent to $9.77 billion in October 2015 from $14.47 billion in October 2014.

The pharma sector continued to witness selling pressure due to a U.S. FDA warning on Dr. Reddy’s. There are also reports of possible violations of federal security laws regarding statements concerning the company’s financial performance.

The macroeconomic events expected in the coming week are – Eurozone Markit PMI Composite data for November 2015, U.S. Q3 GDP data, U.S. Markit PMI composite data for November 2015, U.S. initial jobless claims data for November 2015 and Japan unemployment data for the month of October 2015.

With the results season winding down without any positive takeaways, there is absence of any key trigger for markets and the focus is expected to shift to the winter session of parliament, which will begin on November 26. It will be interesting to see whether the Nifty is able to break the crucial 8,000 level in the coming days as the government tries to push through reforms in parliament, where I expect a logjam due to a combative and cohesive opposition. Nonetheless, markets have already factored in the worst outcome on the reforms front while expecting smaller but quicker steps on policies which don’t need legislative approvals.

The Nifty is expected to consolidate in the 7,750-8,000 range in the coming days, but December could see it scale higher levels. It would be an ideal time to accumulate some of the beaten-down blue-chip stocks.

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