Drought Spectre Haunts Economy

One of the most important trigger for the markets was budget and on the same day the markets remained volatile. However after that there was a good amount of profit booking witnessed in the markets. If we take a look at reasons behind the same, profit booking witnessed amid lack of major reforms Profit booking witnessed amid lack of major reform in Union Budget.

Benchmark equity indices which had rallied to all-time highs finally succumbed to profit taking amid lack of major reforms announcement in the Budget and the uncertainty over implementation of the controversial General Anti-Avoidance Rules (GAAR) led to a sell-off in the eventful week ended July 11.

For the week ended July 11, the Sensex ended down 938 points or 3.6% at 25, 024 posting its biggest weekly loss since December 2011 while the Nifty closed 292 points or 3.8% at 7,460 recording its largest weekly loss since March2013. Selling pressure was also seen in the broader market with the BSE Mid-cap index down 7% and the Small-cap index ended 7.8% lower.

As regards the Budget highlights, the Finance Minister Arun Jaitley presented the Union Budget on July 10 by promising to limit fiscal deficit at 4.1% of GDP for the current fiscal, raised the income-tax threshold for individual tax payers, hiked the foreign direct investment in insurance and defence sectors to 49% and also proposed to sell partial stake in state-owned banks. Industrial output in May 2014 grew by 4.7 per cent, the highest monthly rise since October 2012, giving further momentum to a 3.4 per cent rise in April and raising hope of a recovery.

Investors also booked profits in capital goods and auto shares which had surged after the Government extended an excise duty concession by six months till December 31, 2014. Infosys ended up 2.7% after the company reported a better-than-expected consolidated net profit at Rs 2,886 crore for the first quarter ended June 30, 2014 (Q1). Analysts, on an average, had expected profit of Rs 2,698 crore for the quarter. The company had reported a profit of Rs 2,992 crore in the March 2014 quarter.

As for the global cues, Asian stocks rose, with the regional benchmark gauge on course for its first gain in five days, as telecommunications firms and health-care shares advanced. Nikkei is trading in green with gains of 0.39% and Hang Seng is up almost 1%. Shanghai Composite is also trading almost flat with positive bias.

SGX Nifty is also trading almost flat at 7484 (Up 3 points). In the coming week, corporate earnings will be in focus with TCS, Bajaj Auto, Kotak Mahindra Bank set to announce their first quarter earnings among others. Further the drought like situation in many states is still a cause of concern. Foreign investors were net sellers in equities of over 700 crore on Friday. Further selling could weigh on investor sentiment. The government will also announce the rate of inflation based on the wholesale price index (WPI) for the month of June 2014 today. While we suggest booking profits for those who took entry at initial stage of rally, we still see a lot of buying opportunities in midcap, infra, capital goods and construction ancillary stocks.