India Markets Weekahead: China weighs, but Nifty could rise

January 10, 2016

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

Markets across the world had one of their worst opening weeks ever on rising concerns of a global economic slowdown led by China and geopolitical concerns in the wake of North Korea’s nuclear test. In India, the Nifty index ended the week at 7,601, down 4.5 percent.

FIIs pressed the panic button as they turned net sellers to the tune of $480 million while MFs were net buyers to the tune of $200 million. The rupee stayed at 67 against the dollar.

Chinese markets tumbled after the People’s Bank of China (PBOC) allowed the yuan to fall. Weak factory and service sector output and worries about looming share sales by major company stakeholders once a ban on stake sales expires also eroded sentiments.

A broker reacts while trading at his computer terminal at a stock brokerage firm in Mumbai, India, June 29, 2015. REUTERS/Danish Siddiqui/Files

A broker reacts while trading at his computer terminal at a stock brokerage firm in Mumbai, India, June 29, 2015. REUTERS/Danish Siddiqui/Files

The World Bank lowered its global economic growth forecast to 2.9 percent from its earlier estimate of 3.3 percent in June. However, it remained quite optimistic on India and predicted that it will remain the world’s fastest growing large economy for at least the next three years. It stands to benefit from lower oil prices, reduced external vulnerabilities and an improving domestic business cycle. This is one of the cornerstones based on which I have been bullish for a while.

Crude nosedived to 12-year lows near $32. Oversupply concerns have been the main factor responsible for dragging down prices in addition to Chinese worries. We are getting closer to the doomsday predictions of $20 a barrel, which could finally force producers to tone down their production targets as they become more and more unviable. That’s probably when the cycle could turn as the inefficient and marginal ones are ousted from the market.

Back home, hopes of passage of the crucial GST bill were reignited after the government said it had accepted the demands set by the main opposition party. Though the Congress denied any major rapprochement, I believe there is a window for negotiations and the government may leave no stone unturned to ensure any roadblock is removed.

In macro data, the Nikkei India Manufacturing PMI slipped to 49.1 in December 2015 from 50.3 in November 2015. Meanwhile, the services sector accelerated with the Nikkei Services PMI rising to a 10-month high of 53.6 in December 2015.

In a move to control pollution, the government has decided to skip BS-V emission norm altogether and move to BS-VI, which will have to be implemented from April 2020. This will increase investment in R&D by auto companies. OMCs are expected to spend on capex to the tune of 800 billion rupees ($11.9 billion) for supplying BS-VI fuel. Auto companies will have to spend on making their vehicles compliant to these norms earlier than expected. The capex by frontline companies, which has been declining over the last 2 years, should get a fillip due to this development.

The coming week will see markets reacting to the influential monthly U.S. non-farm payrolls report for December 2015. The week will also see the onset of the results season from India Inc. In line with the trend seen in the past few quarters, operating profit margins are expected to show an improvement on a yearly basis due to lower input costs.

An investor looks at a screen showing stock information at a brokerage house in Shanghai, China, January 8, 2016. REUTERS/Aly Song

An investor looks at a screen showing stock information at a brokerage house in Shanghai, China, January 8, 2016. REUTERS/Aly Song

Export-oriented sectors may continue to witness margin pressures. The revenue growth for commodity-oriented companies like metals and chemicals may remain tepid due to weakness in commodity prices.

Excluding the global cyclical, earnings growth is expected to be decent, suggesting a better trend in domestic demand-based sectors. Sectors like energy and private banking may report double-digit growth while power and metals may drag the overall earnings outlook. Overall, FY16 is expected to see a similar trend in earnings growth as seen in FY15.

Prominent companies scheduled to release their quarterly results next week are TCS, Infosys, Hindustan Unilever, Zee Entertainment, Kotak Mahindra Bank and IndusInd Bank. In line with their latest commentary, IT companies are expected to deliver tepid growth during Q3 FY16 due to seasonality and lower spending by top clients.

The coming week will also see announcements of crucial macro economic data like IIP for November 2015, CPI inflation and WPI inflation for December 2015. Growth in industrial production had surged to a 60-month high of 9.8 percent in October 2015. CPI had spiked to 5.41 percent in November 2015 from 5 percent in October 2015. WPI stood at -1.99 percent in November 2015.

We tend to get overwhelmed by the immediate environment which casts a smokescreen on our vision. We have seen a number of global crises in the recent past which have had a short-term impact on Indian markets. But they also provide us with opportunities. The early part of 2015 was dominated by the crisis in Greece, but today we don’t even talk about it. Though China’s issue is much bigger, I strongly feel that it could improve India’s status in the longer term as a favoured investment destination.

With the start of the earnings season and worries over slowing growth in China, Indian markets could remain under pressure in line with its global peers. But I don’t expect the Nifty to significantly fall below its previous lows near 7,500.

The index is expected to trade in the 7,500-7,800 range in the coming week, with possible upsides if we see better-than-expected corporate results. The mood swings have been very sharp, so I still see the possibility of the Nifty trading at 8,000 and above in January 2016.

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