Markets Weekahead: Greek tremors could be felt in India

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

By Ambareesh Baliga-June 28, 2015
The Nifty ended the derivatives expiry week on a strong note at 8,381, up 1.89 percent. At one point, it looked like the index would consolidate above 8,400, but uncertainty over the Greek debt crisis and the Chinese market crash held it below the crucial psychological level.

Banking stocks remained in the limelight, gaining 2.8 percent for the week due to speculation of a surprise rate cut by the Reserve Bank of India. The central bank’s financial stability report stressed that the asset quality of banks are likely to deteriorate further, which will increase their provisioning. With credit growth falling to near multi-year lows of below 10 percent and structural issues on asset quality persisting, PSU banks will be pressured going ahead.

RBI Governor Raghuram Rajan’s latest comments suggest a global depression similar to 1930s. If we read between the lines, the possibility of a rate cut in India seems remote for now.

L&T saw buying interest on reports of the company listing its Infotech arm this year and raising 18 billion rupees. The de-merger will help the management focus on its core business and also help in unlocking the value of other businesses which have grown in size and require a focused attention for the next stage of expansion.

We should also see interest in the quick service restaurant (QSR) sector with Cafe Coffee Dayfiling a draft prospectus with regulators for an initial public offering (IPO) of around 11.5 billion rupees. It would be interesting to see how the management justifies the expensive valuation when other listed profitable entities in the space such as Speciality Restaurants, Tata Global and Jubilant Foodworks are available at better valuation. The IPO market will be rejuvenated in the next few months with large offerings from Indigo and RBL Bank.

Volatility is likely to gain pace in the week ahead as the Greek drama plays out. The country has time till June 30 to pay 1.5 billion euros to the IMF, failing which Greece seems doomed to exit the euro zone. Greek PM Alexis Tsipras has announced a referendum on July 5 to decide on the “humiliating” austerity measures of creditors, thus shutting the door on any negotiation. U.S. jobs data and the euro zone economic confidence data for June 2015 could get eclipsed by Greece.

On the domestic front, India’s HSBC Manufacturing PMI index for June 2015 will be unveiled in the coming week. The political heat has been continuously rising with various controversies threatening to put the central government on the back foot. There is a possibility of the monsoon session of parliament being derailed, thus delaying the reform process.

Though markets have been rejoicing due to excess rainfall in June, the official weather forecaster is still sticking to its estimate of 88 percent of normal rainfall, which could mean deficient rains in July and August.

Automobile stocks would be in focus as companies start reporting June 2015 sales volume data. Auto stocks have seen a sharp rally of late on the back of good rains, thus improving the fate of the companies, especially those who manufacture two-wheelers and farm equipment.

I remain skeptical of this extended bounce-back and believe that the ground reality has not changed much in the recent past, except better than expected rainfall till date.

The Nifty is slightly overbought at the current levels. Disappointment from Greece and domestic politics would cap the upside. Results for the first quarter of FY16 are just a couple of weeks away and they will give no reason for investors to rejoice. The crash in the Chinese markets does not necessarily mean that funds would come rushing to India.

FIIs may take a cautious view on emerging markets overall, though they were net buyers in India last week after a long time. It’s time to exit long trading positions and investors should wait on the sidelines for events in Greece to play out.