India Markets Weekahead: Poised for a rally

January 31, 2016

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

sensex1.jpgA sharp recovery towards the end of the week helped the Nifty gain nearly 2 percent to close above 7,550. Positions were lighter after derivatives expiry and the markets seemed to be looking at the bright side after a steep correction despite lacklustre corporate results and a weakening rupee. FIIs continued their selling spree with net selling of $171.5 million.

The surprise rally came after the Japanese central bank introduced a negative interest rate policy for the first time to beat deflation. China’s central bank pumped an additional 100 billion yuan ($15.21 billion) into the financial system.

Earlier in the week, the Federal Reserve kept rates unchanged as expected and left the door open to a March rate increase despite acknowledging that U.S. economic growth had slowed since its last meeting in December. The monetary policy stance remains accommodative, thereby supporting further improvement in labour market conditions and a return to 2 percent inflation. This bodes well for emerging markets, especially India, and we could see a reversal of the FII outflows seen over the last few months.

Back home, fiscal deficit for the April-December period came in at 4.88 trillion rupees, which is 87.9 percent of the FY16 target.

Banking stocks declined after underwhelming Q3 results for ICICI Bank. Others missing estimates included Suzlon Energy, L&T, Siemens, NTPC. In the better-than-expected category were Praj Industries, Sterlite Technologies, Power Grid and Havells India.

The Narendra Modi government unveiled a list of 20 smart cities. Sectors related to construction and ancillary services are expected to be in focus as the rollout could have tremendous potential in the coming years.

Engineers India is the fifth divestment drive of the government this fiscal to achieve a divestment target of about 700 billion rupees. The government is divesting 10 percent of its stake in the company and the offer for sale was subscribed 2.54 times.

The coming week is an important one with the Reserve Bank of India announcing its monetary policy on Tuesday. The central bank is widely expected to keep rates unchanged. Its last 50 bps cut in September took markets by surprise, but such aggressive action is unlikely in 2016, as a renewed uptick in food-costs driven inflation puts the RBI’s medium-term price target at risk. Delays in the sowing of the rabi crop amid unusually warm temperatures are likely to push up food inflation in the coming months.

Auto stocks will be in focus as companies start announcing monthly sales volume data for January from Monday. I expect muted numbers. Aviation firms will be watched as a review of jet fuel prices is also due. It seems the downswing for crude is mostly done.

Quarterly results expected next week include Tech Mahindra, Bajaj Auto and Tata Steel. On the macro front, the Nikkei India manufacturing and services PMI data for January is due this week.

Investors continue to be selective on IPOs despite impressive debuts by Dr Lal Path Labs, Alkem Labs and Interglobe Aviation. The recent Precision Camshafts IPO barely managed to scrape through.

On the global front, China’s manufacturing and services PMI data is due this week. The Bank of England will set interest rates and policy makers will unveil their quarterly inflation report with new projections for growth and prices.

With the Nifty having crossed 7,500 levels, expectations are set towards the 7,800-8,000 band in the coming weeks. That could be achieved in a pre-budget rally, but we should see a consolidation in the 7,500-7,700 band before that. The recent uptick indicates the markets have found a bottom at 7,241 and current trends would be confirmed if the Nifty sustains above 7,500 levels for a few days. I still believe the next couple of years should be among the best for Indian markets and this could be an opportune time to increase equity allocation.

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