India Markets Weekahead: Corrections are opportunities to buy

April 10, 2016

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

Brokers trade at their computer terminals at a stock brokerage firm in Mumbai, August 25, 2015. REUTERS/Shailesh Andrade

Brokers trade at their computer terminals at a stock brokerage firm in Mumbai. REUTERS/Shailesh Andrade/Files

The Nifty corrected in line with weakness in global indexes, falling 2 percent for the week to end at 7,550. Uncertainty regarding the quantum and timing of interest rate hikes in the United States spooked investors, and the RBI’s predictable 25 bps rate cut triggered profit-taking.

Among gainers, cement, paper, sugar and power stocks rose, and FIIs were net buyers to the tune of $550 million for the week.

The most awaited event so far this year after the Union Budget was the RBI monetary policy review. Unlike in the past, there was action beyond the headline rate cut, with the central bank reducing the policy rate corridor to +/-50 bps to align market-driven rates closer to the repo rate. Additionally, the central bank reduced the minimum daily CRR requirement from 95 percent to 90 percent to manage liquidity conditions.

Jaguar Land Rover’s retail sales in March rose 29 percent from the previous year to 75,303 units, led by strong volume growth across regions. Tata Motors’ new small car Tiago could affect market leader Maruti Suzuki’s sales due to the pricing and features it offers. The latter is already under pressure after the yen strengthened to a 17-month high against the dollar resulting in margin erosion.

In a bizarre scheme to ensure capitalisation of PSU banks, the government is considering a proposal under which 50 percent of increased salary of higher-income government staff under the Seventh Pay Commission will have to be compulsorily invested in bank capitalisation bonds. While this will result in less cash in the hands of the affected employees, they are expected to get income tax rebate on the amount invested. The move is expected to hurt an expected uptick in consumption – a negative for consumption stocks, which have rallied in recent times.

On the macroeconomic front, the India Nikkei Services PMI accelerated last month to 54.3 from 51.4 in February on the back of faster increase in new business. However, data indicated that companies are still operating below capacity even as backlogs declined at the quickest rate in seven years. The Nikkei India Manufacturing PMI hit an eight-month high of 52.4 in March 2016 from 51.1 in February 2016.

The coming week is a truncated one with only three trading sessions. With the RBI policy review behind us, markets will react to corporate Q4 results, with Infosys kicking off the earnings season on Friday. As usual, expectations from India Inc. is low, and any positive surprise will be rewarded. Sales growth is expected to remain flattish, and benefits of soft commodity prices are expected to wane as they appear to have bottomed out. Also, the declining rupee is expected to play spoilsport and we may not see rising margins. Banking will be the key sector to watch out for as bad loans and provisioning will continue to haunt the sector for some time.

With regards to the IT sector, the street will be more focused on hints from managements regarding FY17 revenue outlook. While Nasscom has already indicated a 10-12 percent growth for the industry in FY17 (constant currency terms), it will be interesting to see the guidance issued by Infosys. From an investment perspective, I have a cautious view on the sector considering the state of the global economy as well as the risks that automation poses to the entire sector.

Among key macroeconomic announcements, the government is scheduled to announce IIP data for February 2016 on Tuesday. It contracted 1.5 percent in January 2016. Retail inflation data will also be released on the same day.

On the global front, U.S. crude oil inventory data, UK CPI data for March 2016 and China’s trade balance data will be unveiled on Tuesday. Euro zone CPI data for March 2016 and China’s GDP and IIP data will be released on Thursday. The Bank of England’s rate decision will take place on the same day.

Coming back to markets, range-bound activity and low volumes suggest that stocks are waiting for triggers, which will come from upcoming quarterly results. For the Nifty, 7,450-7,500 are the key levels to watch out for – a break below this may lead to correction up to 7,200 points. On the upside, if the index breaches 7,750, the Nifty could rise till 7,800-7,900 levels. I still believe that 7,450-7,500 levels would be held, with action shifting to mid-caps and small-caps.

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