August 20, 2017 / 5:06 AM / 3 months ago

India Markets Weekahead: Time for another correction

A sharp bounce-back for Indian stock markets after falling 3.5 percent the previous week was halted by the sudden exit of Infosys CEO Vishal Sikka even as mounting concerns about disruptions in the Donald Trump administration dampened sentiments. The Nifty ended the week at 9,837 with gains of 1.3 percent, as it recovered partly from a sharp intra-day fall on Friday.

A broker reacts while trading at a stock brokerage firm in Mumbai November 11, 2008. REUTERS/Arko Datta/files

Crude oil headed for a third weekly drop as U.S. crude output rose to a two-year high and Chinese refining slowed. U.S. markets fell after growing political turmoil in the country raised concerns that the Trump administration’s pro-business agenda would be disrupted by his recent controversial remarks and a dramatic loss of support from both business and government leaders. The latest to be dumped from the White House is Trump’s Chief Strategist Steve Bannon, one of his most controversial advisers.

Back home in India, Infosys was in the limelight after CEO Vishal Sikka announced his resignation on Friday, wiping more than 200 billion rupees from its market cap as the stock ended down 10 percent. With lack of clarity on the next leadership, investors will be waiting with bated breath.  Clients will prefer to wait on the sidelines and may slow fresh orders till a future plan of action emerges.

There would be short-term turbulence and a new CEO will take a while to settle. The market doesn’t give anyone the luxury of time and Infosys shareholders may lose out. The only saving grace would be the buyback of shares announced at 1,150 rupees apiece. In the coming week, the market will open to another rude shock in the form of a possible class-action suit initiated by U.S. law firm to recover losses suffered by shareholders.

Pharma counters were under pressure after the government’s initiative to make essential drugs more affordable further dampened sentiments. The government proposed to dilute the powers of the National Pharmaceutical Pricing Authority (NPPA), the body that regulates drug prices.

The draft, if implemented, will give the government a greater role in deciding the prices of medicines and medical devices. The street is also concerned that the proposal favours only large pharma companies, will increase entry barriers and strengthen the position of existing companies. The government intends to pursue the sale of drugs by their generic names and put a cap on trade margins.

The central bank MPC meeting minutes were released and clearly state that effective transmission of a policy rate cut is the key to achieve growth and investment. It also highlighted concerns about inflationary pressures from farm loan waivers announced by several state governments and warned this could crowd out private borrowers. RBI Governor Urjit Patel expressed concerns over a gross NPA of 9.6 percent and called for recapitalization of banks along with mergers and sale of non-core assets.

Markets will remain nervous that current geopolitical conditions may rise once again with the U.S. and South Korea planning military drills from Aug 21. China continues to rile India, now with incursion attempts in Ladakh.

The earnings season is nearing its fag end, and will not have much of an impact on markets. Companies announcing their results in the coming week include CARE Ratings, Castrol, P&G and Gillette. First-quarter results announced were mostly a miss as companies reporting numbers below estimates were the highest in the past four quarters - 68 percent of Nifty stocks were downgraded by analysts and recovery is not expected at least for two quarters.

The real test of the Goods and Services Tax (GST) will start after the initial honeymoon period. The last date for payment and filing of GST return for July has been extended to Aug 25. The reconciliation of GST credits could throw up challenges.

Monsoon progress is becoming a worry. The India Meteorological Department said that this year’s monsoon has been 4 percent below the long-period average. The distribution of monsoon rains has been uneven and the deficiency could be larger than reported.

Overall, other than liquidity, I don’t see many reasons for the markets to hold up. Even the bounce-back earlier in the week did not display major strength and the Nifty was not expected to effortlessly cross the 10,000 milestone. With other worries cropping up, Indian markets could tend to correct with the first stop around the 9,600 mark.

Ambareesh Baliga has about 25 years of experience in the stock market and has worked with Karvy and Kotak groups in the past. He is a regular market commentator on various business channels. He is a commerce graduate from Calcutta University and a qualified cost accountant.

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