India Markets Weekahead: Book partial profits and stay cautious

July 10, 2016

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

A broker reacts while trading at his computer terminal at a stock brokerage firm in Mumbai, India, August 24, 2015. India's benchmark BSE index fell more than 5 percent on Monday to their lowest in a year, as a rout in Chinese equities sparked widespread unrest in global financial markets. REUTERS/Danish Siddiqui - RTX1PEZF

A broker reacts while trading at his computer terminal at a stock brokerage firm in Mumbai, August 24, 2015. REUTERS/Danish Siddiqui/Files

On the political front, PM Narendra Modi expanded his council of ministers and also reshuffled some portfolios, probably with an eye on assembly elections in Uttar Pradesh and to send out a signal to ministers to perform or perish.

On the domestic macro front, the Nikkei India Services Business Activity Index dropped to 50.3 in June from 51 in May. On the global front, the latest data showed acceleration in China’s services sector in June 2016. In the U.S., the minutes from the Federal Reserve’s June policy meeting confirmed a dovish stance by the U.S. central bank with a majority of policymakers in favor of keeping rates on hold.

In sector specific action back home, telecom stocks fell after a report that telecom majors may be served a demand notice for underreporting revenues and thereby causing a loss of 125 billion rupees to the exchequer from 2006 to 2010. There was good news for the pharma sector with some companies under the scanner of the U.S. FDA receiving an Establishment Inspection Report (EIR), indicating a closure of the inspection carried out by the agency.

L&T Infotech’s IPO on July 11 comes with high expectations from investors, who have gained in five consecutive listings, namely Equitas Holdings, Thyrocare, Ujjivan, Parag Milk and Mahanagar Gas. The issue is priced in the range of 705-710 rupees with a discount of 10 rupees for retail investors.

In the coming week, markets are initially expected to react to Friday’s upbeat U.S. nonfarm payroll data for

A woman exchanges English Pound notes for Euros notes at a money exchange office in the British overseas territory of Gibraltar, historically claimed by Spain, June 24, 2016, after Britain voted to leave the European Union in the EU BREXIT referendum. REUTERS/Jon Nazca

A woman exchanges English Pound notes for Euros notes at a money exchange office in the British overseas territory of Gibraltar, historically claimed by Spain, June 24, 2016, after Britain voted to leave the European Union in the EU BREXIT referendum. REUTERS/Jon Nazca

June. Investors will also keenly watch the corporate earnings season which will begin next week with Infosys declaring results on Friday. The first quarter is a seasonally strong one for the IT sector, but sentiments are affected by a weak global macro environment, fragile domestic demand and cautious pricing commentary from top-tier IT companies. Key issues to watch out for are management commentary on business impact of Brexit, demand visibility in FY17 and outlook on different verticals along with commentary on margins and pricing.

Among macro economic data scheduled during the week are IIP data for May and CPI for June 2016. Retail inflation increased to a 21-month high of 5.76 percent in May while IIP contracted by 0.8 percent in April. The data will be keenly watched as it would be the last one before the RBI’s policy meeting on August 9.

On the global front, euro zone finance ministers will gather on Monday to discuss, among other things, the impact of Brexit on their troubled economies. The BoE policy meet is expected on Thursday, where it is expected to cut rates due to sluggish economic growth in the UK. China’s IIP data for the month of June and U.S. industrial production data for the month of May are scheduled to be released on Friday.

Given the satisfactory progress of the monsoon so far, investors will now turn their focus to the monsoon session of the parliament beginning July 18 as expectations are high on passage of the GST bill. The Nifty has been hovering in a narrow range of 8,200-8,350 for a while now, and good quarterly earnings could provide the necessary triggers on the upside. However, investors should be cautious as the best of expectations regarding GST are already built in. Secondly, any disappointments in earnings may create jitters as markets are about 10 percent higher compared to last quarter. Finally, the steep move in many of the small and mid-cap stocks is making me edgy. It would be prudent to book profits partially closer to Nifty 8,500 levels, which could possibly be achieved in the coming week.

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