India Markets Weekahead: Hope rally ends, but not the India story

February 14, 2016

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

When markets came crashing down last week, it seemed like January 2008 all over again. A global rout, alarming slippages by public sector banks and disastrous corporate Q3 results pushed the Nifty down 6.8 percent, with mid- and small-cap stocks taking the brunt of the selloff. The triggering of margin calls also accentuated selling pressure and it seemed a number of long-term investors were throwing in the towel as the Nifty closed at 6,980.
Bombay Stock Exchange building is pictured next to police van in MumbaiSentiments across the globe dampened after the Federal Reserve said global economic turmoil and a massive selloff in equity markets could spook the U.S. economy. Crude touched a 12-year low on fears of higher stockpiles. The stock market risk-off resulted in a gold rally of 18 percent this year, driving prices to a high of $1,247 an ounce. Meanwhile, foreign portfolio investors pressed the sell button, offloading stocks worth $413 million. Support from domestic institutional investors was ineffective with shares worth $258 million bought during the week.

Steep losses for stocks of public sector banks triggered by concerns over sticky loans led to sharp selling in the markets. The Reserve Bank of India (RBI) has asked for a cleanup of bank balance sheets by March. Markets feared that additional capital infusion would be required in the wake of increased provisioning and public sector bank stocks fell sharply as a result. Some more pain will be seen in the fourth quarter. Non-performing assets have been a legacy issue for banks and all the stakeholders preferred to ignore it. After the inevitable capital infusion, as public sector banks cannot be allowed to fail, we would see analysts concentrating on the strength of their footprint and business built over decades.

It was a particularly bad week for corporate results with most — including ONGC, SBI, Dr. Reddy’s, Wockhardt — reporting below-estimated earnings.

In the coming week, markets are expected to react to consumer price inflation and IIP data announced late on Friday. India’s retail inflation unexpectedly edged up to a 17-month high in January, while industrial production contracted at a faster-than-expected pace in December. A steep contraction in the capital goods and manufacturing sector was the primary reason. Capex is still elusive and the government has a key role to play in its revival.

A man walks past Bombay Stock Exchange building in MumbaiWholesale price index data is due to be released on Monday. On the global front, China’s trade data for January is scheduled on Monday when business reopens after the Chinese New Year. U.S. industrial production numbers for January are scheduled for Wednesday while data on U.S. initial jobless claims for the week ending Feb. 12 is set to be released on Thursday.

The next major trigger for the market is Budget 2016/17, to be unveiled on February 29. The need of the hour is to continue spending on areas such as building rural roads, houses and other infrastructure, without letting fiscal deficit targets slip. India Inc is about to post another quarter of degrowth at the end of this earnings season and it will be an uphill task for the government to instil confidence in the India story. With “Make in India” week launched in Mumbai, we could hear some market-cheering announcements from the government.

With the Nifty slipping below 7,000 levels, the bears have clearly gained strength and there are talks of further sharp falls to 6,500 – 6,800 levels. The long standing range of 7,250 – 7,850 is now broken. Valuation wise, it is comfortable at 14.6x FY17E and 12.3x FY18E earnings, higher compared to the panic bottom of 2008 when it dropped to as low as 10x 1 year forward. We could expect high dividend payouts from some cash-rich PSUs to fund government coffers.

Nonetheless, one can start nibbling into good quality stocks that have fallen sharply in the recent decline. This could be the end of the hope rally, but certainly not the end of the India story. The wait could be painful, but the move upward could also be sharp.

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