Weakness to continue till elections

The Market sentiment received a significant boost after assuaging commentary from Federal Reserve Chairman Ben Bernanke. This has come as a positive surprise for financial markets globally, which had become extremely jittery after the Fed meeting in mid-June which had suggested that quantitative easing (QE) tapering could start as early as September. Bernanke's comments on inflation and unemployment and the need to pursue accommodative monetary policy in the foreseeable future cast a shadow of doubt on the revival of the US economy.

The US 10-year treasury yield and the dollar index that had escalated sharply over the past one month are likely to ease somewhat in the near term. Commodities such as crude oil could see some up movement. What do all these developments mean for the India equity market? These could stem portfolio outflows seen in the recent past and stabilise the rupee, so we could have a relief rally. As the positive momentum has set in after a lull, the market may choose to ignore fundamentals in the near term. However, in the medium term, reality will hit us hard. Indian macros are badly placed with economic growth substantially below trend, the huge current account deficit, high fiscal deficit, elevated consumer inflation and a weak currency. The worst part is that the government seems to be in no serious mood to address the concerns of the private businesses through constructive policy intervention.

Some quick-fix measures have been taken to arrest the slide of the rupee and to control widening CAD (current account deficit) but major policy decisions are found wanting. The investment cycle seems to be in a viscous downturn with only few corporates having the balance sheet wherewithal to invest even if the environment improves.

The government is challenged by resources to revive growth and political compulsions to rein in the fiscal deficit. The latter is evident from its efforts to implement the National Food Security Bill despite its adverse impact on the finances. On the monetary policy front, a weak outlook and high volatility in the currency have curbed probability of rate cuts in spite of benign wholesale price index-based inflaion. It looks as if the markets and the country are waiting for elections to get over. Given the fact that politicians will get into a campaign mode, decision making will get stalled.

The results season underway is unlikely to throw positive surprises. Downgrade cycle in corporate earnings is not yet over with weakening revenue growth outlook and elevated interest rate threatening further downward revision. To sum it up, the market lacks triggers for a sustainable rally and it seems unlikely now that the Nifty will make a new high in the current calendar year. The range for the Nifty could be 5,600-6,000 till the year-end, with high volatility. We prefer sectors and stocks with better earnings growth visibility and those likely to benefit from currency depreciation. Information technology, pharma, private banks and NBFCs would continue to outperform the market while infrastructure, industrials and metals & mining stocks will continue to underperform.

The author is managing director, India Infoline Ltd