Equity Indices Likely To Rebound

Preceding week was one of the bad weeks for the Indian equities as Benchmark share indices ended lower for the second straight week tracking a sell-off in global equities amid rising tensions between Ukraine and Russia. These geo-political issues intensified after US President Barack Obama authorised air strikes in Iraq. As a result the global equity indices witnessed a decline and Indian equities were not an exception. On the domestic front, rising crude oil prices raised fears of further widening of fiscal and current account deficits while Reserve Bank of India's neutral stance on key policy rates flagging inflation concerns also weighed on investor sentiment in the week to August 8. The Sensex ended down 152 points or 0.6% at 25329 and the 50-share Nifty ended down 34 points or 0.5% at 7,569. In the broader market, the BSE Mid-cap index ended down 152 points or 1.7% at 8962 while the BSE Small-cap index ended down 63 points or 0.6% at 9828.

However there are few positives that have emerged over the last two days. One of the important one is the announcement of guideline by SEBI on Real Estate Investment Trusts (REITS). SEBI issued final guidelines for REITS with some key changes- SEBI has agreed to industry demand for reducing the minimum asset size for REITs from Rs. 1,000 crore to Rs. 500 crore, while it has also decided to allow multiple sponsors.  We feel this would help the larger pool of player and more liquidity. However, the regulator has decided against reducing the requirement of mandatory continuous holding by sponsors to ensure alignment of their interest with that of the Trust. The minimum initial offer size would be Rs. 250 crore with a minimum public float of 25 per cent. The sponsors would need to have mandatory holding of 25 per cent of REIT units for three years and continuous holding of 15 per cent thereafter. Multiple sponsors would be allowed to hold the mandatory holding together. On whether retail investors would be allowed to invest, SEBI feels that the market is still in a nascent stage and therefore it is necessary to keep the minimum investment thresholds at relatively higher levels. The new norms would also ensure that excessive leverage is not undertaken through REITs, while the Trustees would be required to be independent and not an associate of the sponsor or the manager of the Trust. The minimum net worth of the manager would be increased to Rs. 10 crore, from Rs. 5 crore proposed in draft guidelines. We expect this to be a positive move for the Indian Capital Markets and could also free up some liquidity for Real Estate and Infrastructure Players.

Going ahead we are of the opinion that, geopolitical tensions between Ukraine and Russia and the developments in Iraq would continue to weigh on the domestic markets in the truncated week ahead. The markets will remain closed on Friday, August 15, on account of Independence Day. Among the major companies that will announce their first quarter earnings include, SAIL, Tata Motors, Coal India, BHEL, ONGC, Tata Steel, IOC, and Britannia Industries. The market participants are likely to wait for few Data points going ahead. Tomorrow the government will release industrial production data for June 2014 and WPI inflation data for July while on Thursday data on CPI inflation for July will be released.

On the global front, the major averages finished the first full week of August on a strong note. The S&P 500 settled higher by 1.2% with all ten sectors posting gains. Thanks to the advance, the benchmark index added 0.3% for the week. Although stocks ended higher, the futures market was pressured overnight after President Obama delivered a statement last evening, authorizing humanitarian air drops and air strikes in Iraq. The announcement weighed on futures, while giving a boost to Treasuries.

As for Asian equities, Asian stocks are trading in green after Wall Street rallied with the latest round of tensions in Ukraine easing for now, although simmering tensions in other geopolitical hotspots such as Iraq limited gains. While the Nikkei is trading with gains of more than 2% Hang Seng is also trading in green with gains of almost 1%. Shanghai Composite is also trading in green with gains of 0.36%.

SGX Nifty is also trading with significant gains of 52 points (up 0.68%). We expect Indian equity indices to open in green with gap up opening. However after a gap up opening the indices may remain range bound.