In a volatile week, when equities danced to the tunes of political uncertainties, soaring crude prices and surging inflation, bargain buying at the lower levels highlighted the point that valuations play a vital role in stock markets as many battered stocks bounced back sharply. The market is currently influenced by negative sentiments and valuations have taken a back seat, but this is a temporary phenomenon and once the negative sentiments subside, the valuations will be back in reckoning. However, till then wild movements such as the one witnessed last week may continue.
Difficult times: Stockbrokers at the Bombay Stock Exchange react to Sensex movements. Volatility in the market is expected to subside, with the political uncertainty on the nuclear deal probably over.
The inflation worries are far from over and going by the rising commodity prices, it seems the worst is yet to come. But, I think a lot of it is already factored in and the current values of the Sensex and the Nifty, the benchmark indices of the Bombay Stock Exchange and the National Stock Exchange, respectively, adequately reflect it. So I do not think that Fridays, when the data on inflation is released, would be as scary as they used to be for stock markets. Also, the forecast for 2008-09 gross domestic product (GDP) growth by various institutions—UBS (7.7%), Crisil (7.8%), Lehman Brothers (7.6%), HSBC (7%), JPMorgan (7%), Centre for Monitoring Indian Economy (CMIE) (9.5%), Moody’s Economy.com (7.6%), ABN AMRO Bank (7.5%), Reserve Bank of India (8-8.5%) and Macquarie Research (7%)—have factored in the the peak of inflation.
Moreover, according to the chief economic adviser to the finance ministry, Arvind Virmani, the government is not considering any revision of its growth estimate for fiscal 2008-09, which remains at 8-9%. He says, “I recognize that consumption could come down from the peak, (but) our projection of GDP growth of 8-9% factors this in.”
Going by the government’s estimate, the current valuations of the stocks certainly look very attractive. Even if the aggregate average of all GDP estimates is taken, the valuations still look attractive. The sharp growth in tax collections also suggests that the growth story of the Indian corporate sector is very much intact and that reasonably justifies the belief that valuation will be back in reckoning sooner than later.
Though soaring oil prices continue to loom large, India and the rest of the world seems to have adjusted to oil at $150 (Rs6,481) a barrel. Any rise in oil may still create some panic in the market, but it will be followed soon by bargain buying. However, if oil continues to move up unabated, then it may have severe negative impact on stock markets globally. In other words, as long as oil is consolidating with moderate upward bias, there is no reason to panic.
As far as the volatility in India is concerned, we have probably seen the worst as the main driver of that—the political uncertainty over the Indo -US nuclear deal—is getting over. Now the focus will shift to June quarter corporate results. Infosys Technologies Ltd will start the earnings season on 11 July and, as always, its numbers will be watched keenly for cues on the broader spectrum of the industry. Especially, in view of the turmoil in the US economy, more than last quarter’s number, revenue and profit forecast by the company for the next quarter and the remaining period of the financial year would be the key trigger. If the company is able to impress upon its outlook, the stock may ignite buying across the technology sector. Other big Indian companies will be out with their results in the following weeks and that will dictate where the Sensex is headed.
Globally, too, the earning season is now about to begin and in the US, the season will be started by Alcoa Inc. on Tuesday. Its results will be quite important for cues about industrial demand in economies abroad, particularly in Asia and South America. On Friday, the big daddy, General Electric Co., will announce results. General Electric, the second largest US company by market capitalization with a wide range of businesses, will be an important indicator for the stock markets. Financial services account for a large chunk of General Electric’s revenues and the unit’s results is likely to provide ideas about the US financial sector. Also the company has the reputation of meeting analysts’ expectations, thus any negative deviation from that will be negative for the stock markets as well. Among other global companies, South Korea’s Posco, the world’s fourth largest steel maker, will report its earnings this week. The company is likely to report strong earnings as it was able to raise prices to offset soaring raw material prices.
Apart from corporate results this week in the US, the survey of consumers for July will be in focus as the result is expected to show a further decline. Any sharp decline would be negative for stock markets. The retails sales data of major chain stores will be released on Thursday, and these will throw light on consumer spending. Any indication of sluggishness in consumer spending will be considered negative for the US economy and stock markets. The data related to pending home sales for May is due on Tuesday. Since the housing sector is already reeling under heavy pressure, these numbers will be quite important. Going by estimates, the May index will show a decline of 2.5%, compared with April’s 6.3% jump. On Thursday, the weekly dose of jobless claims will be another important number to watch out for.
Technically, the markets are looking on a better footing this week, which means some gains initially. Though a bounce back can’t be considered the confirmation of bottoming out—there are no positive signs yet to confirm that the market has hit its bottom. However, if the northward trend gathers momentum, then we may have signals of a short-term positive trend. So, clearly as per technicals, though there are some gains likely now, that would not amount to the confirmation of a trend.
On its way up, the Sensex is likely to test its first resistance at 13,705 points, which is an important resistance level. If the Sensex breaches this level, then there would be further gains on the bourses as the next resistance for the Sensex would come up at 14,084. This will be also be an important level as a climb over this level will change the sentiments as the Sensex would then target 14,449 points, which is a critical resistance level. On its way down, the Sensex would test support at 13,242 points, followed by another at around 13,012 points. If the index falls below this level, then it would test 12,818 and may even go down to touch a new low of 12,569 points.
On individual stocks, the situation is better this week compared with the last few weeks. Stocks such as Reliance Industries Ltd, Tata Power Ltd and Century Textiles and Industries Ltd look good on charts. Reliance Industries, at its last close of Rs2,097.90, has a target of Rs2,147 with a stop loss at Rs2,055. Tata Power, at its last close of Rs1,104.80, has a target of Rs1,146 and a stop loss at Rs1068. For Century Textiles, with its stock last closing at Rs501.80, the target is Rs529 and stop loss Rs481.
From our last week’s recommendations, Kotak Gold Fund gained Rs79, or 6.21%, during the week, while Quantum Gold Fund rose Rs35.91, or 5.67%, and Reliance Gold Fund improved by Rs62, or 4.91%.
Among stocks, IVRCL Infra and Projects Ltd, though touched a low of Rs257, bounced back sharply to close at Rs304. Bharti Airtel Ltd was a defensive play but succumbed due to heavy fall in the market in the initial part of the week.
Vipul Verma is a New Delhi-based independent investment adviser. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org