Sunday, May 31, 2015

Markets to trade with a downward bias in short term

The May series of derivative contracts ended on a lack-lustre mode. Both the Nifty and the Sensex have been trading with a downward bias after rounds of extreme volatility. The June series has opened on a positive note, buoyed by better than expected GDP numbers and the hope of a 25 bips rate cut by the RBI policy announcement on 2nd June. However, this positive bias should be treated as a short term bounce and may be used to lighten commitment of funds to equity markets. The markets have already factored in the rate cut, and we might see the markets drifting lower in the course of next 2-3 months. The major worrying factors for the markets are listed below:
  • Corporate results: Most of the corporate results for Q4 of FY 2014-15 have been disappointing, and have not kept pace with the expectations of the analysts. This makes us to believe that a real ground level economic recovery is still a good 2-3 quarters away. Most company balance sheets have been artificially boosted by restructuring of doubtful loans, as RBI is seen tightening the restructuring norms from this fiscal. 'Make in India' does not seem to get off the ground despite many noises by the Govt. Companies have been reluctant to add new capacities immediately, fearing a demand slowdown.
  • Progress of Monsoon: Forecasts by Met department regarding a below par South-West monsoon have added to the worries of the Govt. as rural demand is already showing signs of slackness. Global scientists have a strong belief that the El-Nino effect will have a negative impact on agricultural productivity in Asia. Govt. will have to lend support to the farming community by raising support prices of essential crops leading to build up of inflationary pressures once again. RBI may press the pause button on further rate cuts after the most anticipated rate cut on 2nd June.
  • Rupee Depreciation: Indian Rupee, which traded with a positive bias against most currencies, has considerably drifted lower in the past 2 months and is now trading at Rs.64/ dollar. It is likely to drift lower toward the 67-68 mark in the short term. The instability of Rupee in the recent past has been the major cause of worry for Foreign investors, and they are unlikely to return to invest in Indian markets unless they perceive stability in the value of the Rupee. Although, Rupee depreciation will be a positive for exporters, it may lead to further exodus of funds by FIIs. IT and other export oriented sectors are likely to do well in such a scenario.
The above factors are likely to have a negative impact on the markets in the short term, leading to a 5-10% correction from these levels. This correction will be a good time to accumulate quality stocks from infrastructure, banking and automobile sectors for a long term perspective, provided the Govt. is able to maintain its tempo on fiscal consolidation and demand creation through development.