India Markets Weekahead: Overdue for correction

August 20, 2016

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

Markets in India continued to see consolidation for the sixth week in a row. Mid-cap and small-cap indexes outperformed the benchmark, gaining more than 2 percent for the week. The lack of triggers and an earnings season in line with expectations has led to markets trading sideways for the past few weeks. The rupee ended the week at 67.05 per dollar.

market.jpgGlobally, the release of July’s Federal Open Market Committee (FOMC) minutes revealed a divide among the various U.S. Fed members. On the commodity front, crude oil extended gains for the sixth straight week after finding support from a weaker dollar and on hopes that the Organization of Petroleum Exporting Countries (OPEC) may come up with a plan to support prices at its informal meeting next month. Brent crude continued to strengthen.

In stock-specific activity, technology stocks edged lower with the BSE IT index losing 3.72 percent during the week. Infosys fell about 4 percent after it said the Royal Bank of Scotland (RBS) had cancelled a contract. This loss could affect Infosys revenues, but the bigger fear is Brexit repercussions for the Indian IT sector.

Metal stocks gained on reports that the Aluminium Association of India met Mines Minister Piyush Goyal, seeking the imposition of a minimum import price on aluminium products to protect the industry from cheap imports from China and West Asia.

The first big consolidation among public sector banks is being undertaken by the State Bank of India by merging its five associate banks and the Bharatiya Mahila Bank to create a 2 trillion rupee behemoth. Though the group would have synergy benefits in the long term, issues such as employee integration and redundancy along with trade union problems will create road blocks. Other PSU banks gained during the week due to expectations of consolidation in such banks.

On the macro front, WPI inflation accelerated to a 23-month high of 3.55 percent in July from 1.62 percent the previous month, driven by a continued rise in prices of food articles, especially vegetables and pulses.

With news of the passage of the goods and services tax (GST) bill being discounted by the markets, the next phase could see a tussle regarding the cap on GST rates. The final decision will be taken by a yet-to-be-formed council, which could result in a period of uncertainty for markets.

For the coming week, the lack of triggers is expected to keep markets directionless, with the derivative contract expiry adding to volatility. Aurobindo Pharma, NTPC, Tata Motors, HPCL and Tata Power are the major companies set to announce June quarter numbers. Banking stocks may remain in focus as the first tranche (or nearly 75 percent of 230 billion rupees) of the recapitalisation of PSU banks is expected to be released in September.

RTR2PPXE.jpgTelecom stocks will remain under pressure given the ongoing tussle between existing players and Reliance Jio Infocomm ahead of its public launch, and in preparation for the Sept. 29 spectrum auction. Existing players have recently introduced various offers on data packs to capture larger volumes and remain competitive. This will be a strain on their margins.

On the global front, Markit will release its U.S. manufacturing PMI report on Tuesday. U.S. Fed Chair Janet Yellen speaks at the Kansas City Fed’s annual monetary policy symposium on Friday. On the same day, the Bureau of Economic Analysis will release the second estimate of U.S. GDP for the second quarter.

Indian markets may continue with consolidation but the movement in fringe stocks indicates that we are close to an intermediate top. Lack of triggers will reduce investor interest and momentum after the derivative contract expiry, thus leading to a correction. I would continue to advise profit-booking to redeploy in a correction.

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