India Markets Weekahead: Use gains to reshuffle portfolio

March 6, 2016

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

A confluence of positive factors, both global and local, led to a sharp rally in Indian stocks. The budget did not have anything positive for markets but it put to rest fears of re-introduction of a long-term capital gains tax which was worrying investors for the past month. From the panic lows of 6,850 on budget day, the Nifty rallied to end the week almost 6.5 percent higher.

FIIs who have been net sellers for the past two months turned net buyers to the tune of $526 million. The rupee continued to strengthen during the week to close at 67.16 against the dollar.

A broker trades on his computer terminal at a stock brokerage firm in MumbaiForeign investors seemed to cheer the fiscal consolidation road map of the finance minister, who stuck to the fiscal deficit target of 3.5 percent of GDP for 2016-17, after achieving the target of 3.9 percent of GDP in 2015-16. There are also hopes of a rate cut by the RBI, which had earlier indicated that it will look at the government’s fiscal stance before determining its policy action.

Globally, signs of improvement in the U.S economy increased after the U.S. Federal Reserve’s “beige book” report showed economic activity in most areas of the U.S. grew in recent months, while a private jobs gauge suggested employment rose in February.

Oil prices rose 10 percent for the week after Russia’s Rosneft, the world’s biggest-listed oil producer by volume, said it is considering a cut in domestic production to balance global supply. Further, the governor of the Bank of Japan said he is not considering lowering the central bank’s benchmark interest rates deeper into negative territory for the time being.

Another important development worth noting is the sharp rally in banking stocks. The budget announcement of 250 billion rupees for recapitalization of PSU banks was considered insufficient considering huge NPAs in the banking system.

However, the RBI subsequently announced relaxation of rules governing the core capital requirement of banks under the upcoming Basel III system. This allowed revaluation of foreign reserves, real estate and treatment for deferred tax in calculation of Tier 1 capital that could roughly add 250-300 billion rupees to Tier 1 capital of public sector banks alone.

The RBI circular in effect mitigated all concerns related to the lower-than-expected capital support for PSU banks.

Automobile data for February was mixed with MHCVs (medium and heavy commercial vehicles)  delivering strong growth while PVs (passenger vehicles) remained soft. The CV (commercial vehicle) segment continued to grow on the back of higher growth from the MHCV segment due to replacement demand and pick-up in road construction and mining activities.

In the budget, the government introduced an infrastructure cess following which companies like Tata Motors, Maruti and M&M hiked vehicle prices to pass on the impact to customers.

Moving on to macro data, the Nikkei India Manufacturing PMI came in at 51.1 in February, unchanged from January, whereas the Nikkei Services PMI fell to a three-month low of 51.4 from 54.3 in January.

Meanwhile, Indian IT companies are in focus after India filed a complaint at the WTO against the U.S. for its decision to impose high fees on temporary working visas which makes Indian IT companies less competitive.

For the coming week, truncated due to a holiday on Monday, markets may initially react to Friday’s U.S. non-farm payroll data, which showed the clearest sign yet of labour market strength and eased fears of a recession, which would in turn allow the Fed to gradually raise interest rates. Markets will also react to China’s budget and official GDP target for 2016.

On Thursday, the ECB Governing Council meets to review interest rates and stimulus programmes. Back home, we have the IIP data for January on Friday.

A notable point in the week’s rally was a sharp surge in discount of Nifty futures versus spot. This is attributed to a sudden rush by various corporates to declare dividend before March 31, after which Dividend Distribution Tax (DDT) of 10 percent on dividend earnings above one million rupees will be applicable as proposed in the budget. A number of PSUs are also declaring hefty dividends to shore up government revenues.

With the biggest business and economic event of the year behind us, the next key trigger would be state elections, followed by monsoon forecasts. The dates for assembly polls in Kerala, West Bengal, Tamil Nadu, Assam and Puducherry have been declared, beginning with Assam on April 4.

With markets surging sharply, it would be prudent to remain cautious at this juncture and use gains to reshuffle your portfolio. A V-shaped recovery cannot last too long with a meaningful consolidation, which we are yet to witness. If the Nifty manages to surpass the crucial level of 7,500, we could see a sharp rally towards 7,700-7,800 – the next important resistance zone.

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