India Markets Weekahead: Wait for market consolidation

February 7, 2016

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

A gap-up on Thursday and a follow-up rally on Friday helped the Nifty move closer to the crucial 7,500 mark in what was a highly volatile week. Following a recovery in global stocks triggered by reduced expectations of further U.S. Fed rate hikes this calendar year, the index managed to recoup its intra-week losses.

sensex1.jpgAs expected, the RBI kept repo rates unchanged at 6.75 percent while retaining its accommodative stance with a focus on inflation and the upcoming Union Budget. The central bank said inflation is expected to be 5 percent by the end of fiscal 2016-17. However, implementation of the Seventh Pay Commission’s recommendation, which has not been factored into the projection, will push up the inflation trajectory for a period of one to two years. For CY2016, there is scope for a 50 bps rate cut but it could be more back-ended.

The Nikkei India Manufacturing PMI rose to 51.1 in January 2016 from 49.1 in December 2015, suggesting that the manufacturing sector has returned to expansion mode. Nikkei India services PMI hit a 19-month high at 54.3 in January 2016 against December’s reading of 53.6. The degree of optimism registered in January was the most pronounced in six months, according to Markit Economics.

A government panel has approved seven infrastructure projects in road and port sectors envisaging investment of 97 billion rupees. These include national highway projects in Maharashtra, Himachal Pradesh and Uttar Pradesh.

Automobile sales for January were a mixed bag with passenger vehicle sales mostly subdued. Industry leader Maruti registered a yearly decline of 2.6 percent. Two-wheeler volumes remained weak due to the continued sluggishness in rural demand but Royal Enfield bucked the trend by registering a strong yearly volume growth of 65 percent. The commercial vehicle segment continued to grow on the back of higher growth from the MHCV segment. The LCV segment remained subdued on the back of weaker demand from urban areas.

Industry majors Tata Motors and Ashok Leyland Ltd registered a strong yearly volume growth of 30 percent and 40 percent respectively in the MHCV segment. Tractors exhibited a flattish growth with M&M registering a minimal growth of 1 percent on a yearly basis. The trend in the MHCV segment indicates that the economy is exhibiting signs of recovery.

RTX1I8F0 (layout (comp))The coming week will see markets reacting to a slew of corporate earnings by index heavyweights like Tata Motors, SBI, M&M, ONGC and Dr Reddy’s Labs. Among other names announcing their results are Hindalco, Punjab National Bank, GAIL, ACC, Ambuja Cements, Cipla, Coal India, Hero MotoCorp, Bharat Heavy Electricals and BPCL.

On the macro front, the government will announce GDP data for December quarter on Monday, and data on industrial production (IIP) for December 2015 will be announced after market hours on Friday. Also due on Friday is the CPI inflation data for January 2016.

On the global front, there will be a lack of cues from China as its stock markets will remain closed for the Lunar New Year holiday. In the U.S., Fed Chairperson Janet Yellen will present the central bank’s semi-annual monetary report.

With the Union Budget later this month, expectations and talk of reforms could act as the next big trigger for stocks, but it needs to be seen whether disruptions in parliament continue as witnessed in the last two sessions.

With the crucial GDP data scheduled to be announced along with key corporate results, volatility is expected to prevail in the upcoming week. Disappointment on these fronts may push the Nifty down to the 7,200-7,500 range. I would suggest a wait-and-watch strategy till the index reaches the 7,600 levels. Once we witness stability and consolidation, investors should increase their exposure.

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