India Markets Weekahead: Stocks may continue to rise

September 4, 2016

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

Markets led by large-caps conquered Nifty 8,800 levels after a gap of 18 months. Measures announced by the government to revive the construction sector boosted sentiment, while disappointing GDP numbers were shrugged off by investors as a revival in growth is seen on the back of a good monsoon and an expected boost in consumption due to a hike in the pay of current and former government employees.

Auto numbers for the month of August were largely in line with expectations, sending the BSE auto index surging by 5 percent for the week. However, sales of medium and heavy commercial vehicles were below expectations for the third month, declining 10 percent on a yearly basis. Passenger vehicles registered strong volume growth with Maruti Suzuki reporting a 12 percent growth.

People watch a large screen displaying India's benchmark share index on the facade of the Bombay Stock Exchange (BSE) building in Mumbai,  January 20, 2016. REUTERS/Shailesh Andrade/Files

People watch a large screen displaying India’s benchmark share index on the facade of the Bombay Stock Exchange (BSE) building in Mumbai, January 20, 2016. REUTERS/Shailesh Andrade/Files

Banking and infrastructure shares were in focus after the union cabinet cleared a proposal to release 75 percent of all arbitral dues to construction companies in government contracts. This move will help restart stalled projects as companies repay bank loans, thus ensuring fresh credit. It will also increase the ability of construction companies to bid for new contracts, thereby improving revenue visibility and reducing strained working capital cycle.

Additionally, it will ease the stress on the banking sector, where an estimated 700 billion rupees is tied up in arbitration with over 85 percent claims raised against government bodies still pending. The new norms will also allow faster recovery of loans by banks. Overall, it’s a huge positive for the infrastructure sector.

Reliance Industries Chairman Mukesh Ambani unveiled the much-anticipated Jio telecom service with aggressive data pricing and free voice calls. Shares of Bharti Airtel, Idea Cellular, Reliance Communications and Tata Communications collectively lost around 124.5 billion rupees in market capitalisation during the week.

The telecom sector is expected to continue to underperform as the incumbents will now try to match Jio’s aggressive pricing. Subscriber churn is expected in the coming months, impacting profits for all players. Concerns over a spectrum auction on October 1 will also weigh on the sector.

In the coming week, markets are initially expected to open with a gap-up, reacting to Friday’s U.S. nonfarm payroll data for August. Overall sentiment in India is expected to remain buoyant due to the government’s initiatives for a revival of the construction sector, robust automobile sales, a good monsoon and an expected consumption boost after implementation of the 7th Pay Commission.

A broker trades on his computer terminal at a stock brokerage firm in Mumbai, India, January 20, 2016. REUTERS/Shailesh Andrade/Files

A broker trades on his computer terminal at a stock brokerage firm in Mumbai, India, January 20, 2016. REUTERS/Shailesh Andrade/Files

However, September-end could witness some upheaval in the currency markets as FCNR deposits worth $24 billion will come up for redemption.

The current market rally has been driven by beaten-down sectors such as construction, infrastructure, metals, cement and PSU banks on the back of various government initiatives, while sectors which form the major part of the Nifty market capitalization – IT, FMCG, pharma, oil & gas and telecom sector – are underperforming.

Considering the current earnings momentum, a full-fledged corporate recovery is still a few quarters away. While the prevailing positive sentiment and gush of liquidity will possibly push markets higher, I would still recommend booking profits at every higher level and wait for a significant correction to re-enter.

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