The markets continued to drift lower last week in the absence of any fresh triggers and the weakness in global markets. The fall on the bourses last week were primarily due to weak global cues, led by the US.
However, India suffered a fresh blow on lower gross domestic product (GDP) forecast. There was nothing shocking or surprising in it, though, given that the latest economic figures related to industrial production and other industrial performances were pointing to this. But I think there is nothing much to worry on that count as the Reserve Bank of India (RBI) holds the trump card: the option to cut interest rates and stimulate the economy.
But all is not well on the global front and this week, too, it will be a purely global trend, which will influence Indian bourses. Now the biggest threat is not from the US, but from China. A lot has happened since the Chinese bourses closed on 5 February. During this period, US markets registered their biggest single-day loss in the last one year and in the following days it slipped further. When the Chinese bourses reopen on Wednesday, they will catch up with the global markets which have fallen significantly. It is worth mentioning here that the Dow Jones Industrial Average lost 4.4% in the last week while the Standard and Poor’s 500 fell 4.6% and the Nasdaq Composite Index ended 4.5% lower.
Moreover, the prices of American depository receipts (ADRs) of Chinese companies suffered sharp losses during last week, which is a kind of confirmation of what now seems to be inevitable unless global markets see a major recovery in the initial part of the week. Some of the worst hit Chinese ADRs included oil refiner PetroChina Co. Ltd, based in Beijing, down 4.9% for the week; Yanzhou Coal Mining Co. Ltd, down 7.1% for the week; and the Aluminum Corp. of China Ltd, down 6.1%.
Even worse, other ADRs not dual-listed in Shanghai and Hong Kong but widely tracked in the Chinese market, suffered even heavier losses. China Internet search company Baidu.com Inc. ended down 13.2% last week, and China solar panel maker Suntech Power Holdings Co. Ltd finished down 18.9%. If the Chinese markets have to catch up so much, one can easily expect what would happen next.
That’s not the end of the story as another storm is brewing in the US financial market. Bond insurers are facing the risk of a ratings downgrade and at the same time are quite desperate for funding as they had guaranteed repackaged subprime mortgages and other risky debt that have now soured.
If the bond insurers can raise fresh capital and fulfil their commitment, then this crisis will be postponed. However, if their rating downgrades continue and they run into difficulties in raising money, then this could kick off another financial crisis in the US. This is the most worrying factor dogging the US markets, more than the recession fears.
As a matter of fact, the US equity market has factored in the present state of economy and has also adjusted itself for the initial recessionary fears, so any further sharp fall will not be due to quarterly results or economic reports but will be on news related to bond insurers. So the investors tracking US data should also add the news related to bond insurers to comprehend the US market trend.
As far as India is concerned, the markets will open with the listing of most awaited initial public offering (IPO) of recent times: Reliance Power Ltd.
The listing of Reliance Power might prove to be a piece of good news for the bourses. If the stock lists above Rs900, then it will be good news for the market. But a listing below Rs700 may turn out to be a negative trigger as there will be a lot of selling pressure in the stock, which will spill over to other stocks as well.
However, the silver lining is that with the listing of Reliance Power, a good sum of money will get released and may find its way into the stock markets. I think investors should wait and watch to see the full impact of Reliance Power before taking new investment calls.
Moreover, since the market sentiment is already weak following the shelving of the IPOs of Emmar MGF Land Ltd and Wockhardt Hospitals, investors should be extremely cautious in their investments now. But since the values have come down to much more realistic levels now, some bargain buying will also be witnessed at the lowerlevels.
Technically, this week, the Sensex is likely to find its first resistance at 17,688 points, which will be a minor resistance. However, a convincing breakout above this level could trigger some gains on the bourses, which may take the Sensex to 18,059 points, which is the second resistance level. If the Sensex crosses this level also, then the next resistance will come at 18,249 points, which will be a major resistance level. If the Sensex breaks this level, then sentiments would improve in the short term.
The Sensex will then face resistance at 18,716 points followed by 18,893 points. On its way down, the Sensex would test its first support level at 17,193 points; this being a minor support level, it could break that easily.
The Sensex could test its next support level at 16,953 points, and if it breaks this level, the index could drop to 15,852 points.
This week, technically, ABB Ltd, ACC Ltd and Andhra Bank look good on charts. ABB at its last close of Rs1,284 has a target of Rs1,328 with a stop-loss of Rs1,253. ACC at its last close of Rs780 has a target of Rs809 and a stop-loss of Rs759. Andhra Bank at its last close of Rs89.40 has a target of Rs96 and a stop-loss of Rs83.
From our last week’s recommendations, Oil and Natural Corp. Ltd met its target of Rs1,076 comfortably and hit a high of Rs1,121. Titan Industries Ltd also met its target of Rs1,268 and touched a high of Rs1,276.
However, Steel Authority of India Ltd missed its target of Rs241 and its high for the week was Rs236.
Vipul Verma is a New Delhi-based investment adviser. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org