India Markets Weekahead: Time to move from debt to equity

January 24, 2016

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

The Bombay Stock Exchange (BSE) building is pictured next to a police van in Mumbai, India, August 24, 2015. REUTERS/Danish Siddiqui/Files

The Bombay Stock Exchange (BSE) building is pictured next to a police van in Mumbai, India, August 24, 2015. REUTERS/Danish Siddiqui/Files

The Nifty closed at 7,422 on Friday, down about 0.14 percent from last week. That paints a rosy picture, but in reality markets were back from the brink after a mid-week plunge saw the Nifty sink below 7,250.

The end of the week brought in a hope rally triggered by the European Central Bank meet that suggested the possibility of stimulus measures by March. A rebound in crude oil prices also led to gains across the globe.

Buying momentum was particularly strong in India’s

PSU bank index and the metals index, as the two bore the maximum brunt during the week. Short covering and value buying lifted the most beaten-down stocks and sectors.

The rupee slipped significantly against the dollar and crossed the 68 per dollar mark led by sharp selling in domestic equities. Foreign investors were heavy sellers with shares worth $952 million sold during the week. Domestic institutional investors continued on their contrarian path, buying shares worth 31.19 billion rupees.

China’s economy slowed to a 25-year low, with a growth of 6.9 percent in the fourth quarter of 2015 spooking world equity markets and crude oil prices. The head of the European Central Bank said Europe’s monetary policy will be reviewed and recalibrated in March as downside risks to the economy have increased due to the fall in oil prices and crisis emanating from emerging markets, particularly China. There are growing expectations of the Bank of Japan following suit at its Jan. 29 policy meet.

The International Monetary Fund (IMF) retained India’s growth forecast for the next two years even as global growth estimates were lowered. The Indian economy is expected to grow by 7.5 percent in FY17 and FY18, the fastest among major economies. But macro numbers continue to disappoint with December trade deficit at a four-month high on soaring gold imports, while exports continued their fall for the 13th consecutive month. The Cabinet nod to the new power tariff policy is positive for companies in the renewable energy sector.

Corporate earnings were more or less dismal with ITC, RCom, Idea Cellular and other missing estimates. Interglobe Aviation fell sharply by 20 percent after reporting its Q3 numbers. Reliance Industries, Kotak Mahindra Bank were among those reporting results in line with expectations.

The coming week will see another set of key corporate results. The important ones include HDFC Bank, HDFC, Power Grid, Maruti, ICICI Bank, Bharti Airtel and Vedanta. Volatility is expected to continue ahead of derivative contract expiry on Thursday.

The two global events scheduled during the week include monetary policy meetings of the U.S. Federal Open Market Committee (FOMC) and the Bank of Japan. The FOMC is widely expected to keep U.S. interest rates unchanged at the end of a two-day policy meeting starting Jan. 26.

With the Nifty having bounced back above the key 7,400 level, the odds are for an extension of a relief rally towards 7,600 on the back of short covering. It would be interesting to watch for action from foreign portfolio investors in the coming weeks.

Mid- and small-cap companies that are heavily beaten down are expected to see some pullback. However, one must exercise caution as the valuations in some companies are at unrealistic levels. On the other hand, a number of frontline economy stocks are at multi-year low valuations, which means it’s time to partially shift allocation from debt to equity.

I have been optimistic on the markets, although we cannot be sure of the bottom unless the Nifty sustains above 7,600 levels and consolidates. Till then, you need nerves of steel to survive this volatility and make gains.

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