Bleak outlook for Indian markets

With the Nifty dropping to 5,300 levels, the current outlook for the Indian markets seems bleak in the medium term.

Current reactions to the gross domestic product (GDP) data announced on Friday suggest that the Nifty will continue to be volatile. With an unexpected strong growth of 5.5 per cent, the GDP data have dashed hopes of possible rate cuts by the Reserve Bank of India (RBI), leading to tightened levels of liquidity. As of now, we expect the first half of September to remain highly volatile while in the second half, after September 17, 2012, we may see a sideways consolidation for the next move.

Mid-term growth prospects do seem shaky with a possible meltdown from Europe. Low trading volumes have been witnessed in the US and Asian markets consecutively, given poor industrial growth in Japan and the data of unemployment at above eight per cent for the US. India’s focus on liquidity will also be under scrutiny this week as the US Federal Reserve’s current economic conference at Jackson Hole gets underway and remedial measures for the ongoing Euro zone crisis are discussed, including the possible buying of debt for Spain and Italy, and a cap on yields from resultant bonds. Should the US Fed and the ECB follow this through, they will reduce the high borrowing costs being incurred and will keep global liquidity buoyant. This, in turn, is expected to flow to the Indian markets as capital inflows from foreign institutional investors (FIIs), further upping expected Nifty to 5,600 points at least. Should the reverse be true, we could expect a minor to a fairly large correction.

The ongoing political issues like the scam on coal, policy paralysis, etc, will also adversely affect the market and have the potential to turn the market trend fairly bearish in the current scenario.

According to monthly movements, trends are uncertain and the Nifty may not cross 5,490 levels on the higher side or 5,030 on the down side. Current formations suggest the market will be range-bound for some more time. The short-term outlook indicates some expected weakness, possibly below 5,255 levels.

However, should the market sustain the Fibonacci retracement levels of 5,165/5,190, ensuing support will lift it to 5,350/5,380 levels again in a fairly short period of time. We expect the markets to bounce back given the low leveraged levels of the Indian markets and the rupee trading at around 56 levels. We feel the market will cross 5,490 only if the rupee crosses 54.90 to appreciate further against the dollar.

For the medium term investor, we foresee two buying zones – 5,200-5,170 and 4,950/4,900. For short sellers, we see levels of 5,400 with a stop loss above 5,490. For banks, Nifty at 9,940/9,890 seem excellent and support for any closing below could lead to a drop to 9,400 levels. Bank Nifty could be range bound between 9,400 and 10,250.

Should the market survive 5,190/5,165 and recovers, we would advise investors to concentrate on PSU banks. Private banks are expected to underperform while auto stocks are available at support levels, especially in the two-wheeler segment. We expect stock specific activity from the technology and FMCG sectors. In pharmaceuticals; we are concentrating on domestic/index-based stocks to invest on declines (like Cipla and Ranbaxy).

Our recommendation would be to avoid metal and infra stocks as the trend is weak.

The author is head of technical research, Kotak Securities