Indian markets ended a truncated week on a flat note due to lack of triggers. A bit of relief for Infosys along with gains in pharma stocks managed to limit a further slide in the Nifty. However, the momentum did not evince any confidence for the Nifty to be able to again cross the 10,000 milestone in a hurry. Oil climbed on Hurricane Harvey fears.
During the week, markets followed positive global cues on optimism over Donald Trump’s tax reform plan. But cautiousness prevailed after Trump threatened to bring the government to the brink of a shutdown if needed to pressure Congress into funding the border wall. His comment that he might terminate NAFTA raised concerns over its impact on global trade.
In stock-specific action, Tata Motors was in focus after the top management indicated that its domestic turnaround story is intact. Infosys saw some relief from its daily bashing on reports of former CEO Nandan Nilekani making a comeback to the board. Top fund managers had written to the Infosys board that Nilekani enjoys the confidence of customers, stakeholders and employees and his return to the board would instil credibility.
Nilekani did return to the board as non-executive chairman on Thursday evening and has his job cut out clearly. He needs to get the employees and the management on the same page and get a CEO on board at the earliest.
Public sector banks gained after the Cabinet gave in-principle approval for merger of state-owned banks. The government seeks to consolidate 21 state-owned banks in the country. The finance ministry said it aims to create strong and competitive banks that can absorb shocks and have the capacity to raise resources without depending on the state exchequer.
There are two scenarios - weaker banks merging with stronger banks will hit the valuation of the stronger banks. However, if a number of weak banks come together, it will require huge amount of capital infusion. I would still bet on the former since the government may not be in a position to set aside the sum required for recapitalization.
Meanwhile, Avenue Supermarts stock price crossed the 1,000 rupee mark and its market capitalization crossed 630 billion rupees, which is higher than some Nifty companies such as Britannia, Zee, Hindalco or Tata Steel. The stock price has zoomed 235 percent since its listing. This is primarily because of a dearth of good companies to bet on at these elevated market levels and the crazy valuations investors are willing to offer. Even so-called “fundamentally good stories” can create a bubble-like valuation.
The pharma sector saw a small recovery after a sharp fall. The USFDA issue seems to be sorted to a large extent with most pharma companies falling in line. However, the effect of falling U.S. generic margins will play out over the next few quarters, though the market seems to have discounted this with a nearly 60+ percent fall in the last few months. Thus, a slightly better-than-expected performance after a pathetic quarter could see fresh buying in a sector that could be bottoming out.
Meanwhile over the extended weekend, a number of developments will shape the course of the market in the coming week. North Korea fired short-range missiles into the sea off its east coast as South Korea and the U.S. military were conducting their annual joint drills.
On Monday, the markets will react to global cues based on speeches from Federal Reserve Chair Janet Yellen and ECB President Mario Draghi at the Jackson Hole Symposium on Friday. Draghi seemed to walk the middle path by being neither hawkish nor dovish. He failed to talk down the euro which jumped up against the dollar. U.S. Treasuries traded higher after Yellen’s comments.
Back in India, violent protests in Haryana and adjoining areas due to the rape conviction of a self-styled “godman” Gurmeet Ram Rahim Singh left several dead. Though this may not have an immediate impact on the markets, it would put the government on the backfoot.
Volatility is expected to prevail as it is derivative contract expiry week. In stock-specific action, auto companies will be watched as companies will disclose their monthly sale numbers for August.
On the macro front, the government is expected to announce June-quarter GDP data on Thursday. GDP grew by 6.1 percent in the March quarter, the slowest in the previous nine quarters. Also, the Nikkei manufacturing PMI is scheduled to be announced on Friday.
I do not expect the Nifty to cross the 10,000 milestone easily and markets could see the next round of correction soon.
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.