India Markets Weekahead: Survival of the fittest

January 17, 2016

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

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 bloodbath on Dalal Street extended with key indexes ending down 2 percent after plunging 4.5 percent the previous week. The Nifty ended the week at a 19-month closing low as broader markets depicted weakness, with mid- and small-cap indexes shedding 6 percent and 7.5 percent respectively.

Concerns over slowing global growth, particularly in China, took centre-stage amid a slew of weak economic data. Oil continued to fall with a closing of $30 for the first time since 2003 on fears that Iranian oil will add to global supply glut.

Foreign portfolio investors pressed the panic button as they turned net sellers to the tune of $450 million while there was marginal buying by domestic institutions. The rupee fell to 67.81 against the dollar, its lowest since September 2013 when the country was suffering from its worst market turmoil since the 1991 balance of payment crisis. Murmurs on the street indicate the rupee could hit the 70-72 mark against the dollar this year. However, I am of the view that it will recover to hover in the lower end of the 64-68 band in the second half of 2016.

The earnings season has begun with India Inc. delivering weak results along with muted guidance barring Infosys, which announced better-than-expected numbers. Infosys reported quarterly growth of 2 percent in constant currency terms adjusting for one-time revenue in the preceding quarter. The volume growth was strong at 3 percent. The company has raised full-year dollar growth guidance to ~13 pct year-on-year in constant currency terms from an earlier 10-12 percent.

Weak seasonality coupled with the floods in Chennai has led to TCS reporting muted quarterly revenue growth of 0.5 percent. HUL disappointed with profits shrinking more than expected despite lower raw material costs. Growth continued to be impacted by phasing out of excise duty incentives and price degrowth, as the benefit of lower commodity costs had to be passed on to consumers. Major players in the FMCG space have acknowledged the impending threat from Patanjali, the brand promoted by yoga guru Baba Ramdev. Among other companies posting below-expected results were Pipavav Defence, Indian Hotels, Zee Entertainment, Indusind Bank and Federal Bank.

Macro data was particularly disappointing. IIP for November 2015 declined by 3.2 percent vs expectation of +2 percent growth, suggesting a moderation in industrial activity. The key letdown was manufacturing, which contracted by 4.4 percent. Retail inflation for December 2015 was 5.61 percent, mainly due to a rise in food prices.

The coming week has a number of larger companies announcing their results. These include RIL, HCL Tech, Axis Bank, Kotak Mahindra Bank, Wipro, Ultratech Cement, Cairn India, Idea Cellular, ITC and Asian Paints.

The union budget will be presented on February 29. Finance Minister Arun Jaitley has already hinted that the budget will be “social-sector centric”. This budget is very critical for the government given the industry’s expectations on several fronts and the current macro-economic scenario. This could be the “make-or-break” budget for the Modi government.

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

China will continue to send shocks to global markets as it is set to announce its Q4 December 2015 GDP and full-year 2015 GDP data on Tuesday along with December 2015 industrial production data. ECB’s monetary policy statement, Eurozone Markit PMI Composite data for December 2015 and U.S. existing home sales data for the month of December 2015 are also due during the week.

Indian markets are falling due to global slowdown concerns and a lack of visible recovery in earnings of Indian companies. Sentiments have turned extremely weak. With frontline companies scheduled to announce their results along with China macro data, markets could settle in the 7,400-7,600 range. However, for a long-term investor, this is an opportunity to start accumulating fundamentally sound stocks.

Since we may not see a V-shaped recovery immediately, the current situation may give us the luxury of picking stocks at our own pace and level. Although the broader indexes may not fall much further from here, the pain in the mid- and small-caps would continue, especially the ones which had appreciated sharply in the last few months based on speculation. Markets will test your patience and it will be the survival of the fittest.

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