European Woes Back In Action

The equity markets all over the world remained under pressure during this week. The events that took place in Europe pulled the global indices down between 1 to 2.5 per cent. The European indices declined the most. The US markets were also in the negative. The Brazilian index Bovespa was also down by 2.43 per cent. Besides the European woes, the earnings season is also currently taking place which is also impacting the overall stock-specific sentiment.

In the Indian equities while there are not strong positive triggers, the negative triggers are abundant. The markets were expecting some policy action from the government after the presidential election results but the government was in crisis after NCP chief Sharad Pawar sent his resignation last week and also skipped the cabinet meeting. The issue at this moment has resolved and Pawar is back in the government.

The progress of the monsoon is still very weak even though there were reports that rains will be normal in the country. Now two months i.e. nearly half of the monsoon season have almost gone dry and worries of a weak agriculture season have emerged. According to fresh reports, there is 22 per cent deficit in the rains from a long-term average. Normal to excess rain is seen only in 14 regions while 18 regions are suffering from deficient rains while four regions are showing scanty rains.

Eyes are therefore set on the RBI’s next move in its July monetary policy meeting to be held on the 31^st of this month.The current WPI inflation is above 7 per cent and there is further fear of growth in the same. The RBI has said that the threshold limit for India is 5 per cent and hence the market will not expect any rate cut action.

The markets were also expecting reforms by the government after the election of the president. This week the country saw former finance minister Pranab Mukherjee becoming the 13th president. There were hopes that the government would indulge in some policy action that would have boosted the investors’ sentiment in the country but the same continues to elude.

On the global front the European woes have once again come to haunt the global markets. There were fears that Greece would default and Spain would need more bailout packagse. Analysts expected the exit of Greece from the euro zone and this dragged down the US and European indices by 3 per cent in a single day on Monday in the initial hours. Spain has paid a higher yield on its short-term bonds since the birth of the euro zone, reflecting that it is fast approaching towards a much required bailout package. To add more negatives, the prime minister of Greece, Antonis Samaras, has said that the Greece economy could shrink by 7 per cent this year.

The president of the ECB on Thursday gave a positive assurance by saying that the future of the euro zone is positive and the ECB will take all the necessary action to preserve the euro. Though the markets showed some positives on Friday we must understand that the markets have not completely absorbed the euro zone debt crisis. This is a caution for the investors to invest very carefully with the best possible knowledge of the markets. In Asia the Chinese central adviser has forecasted economic slowdown, casting shadows over the recovery in Chinese economy even after the monetary easing carried out by the government.  

The Indian national currency during the week has shown some strength and appreciated by over 0.5 per cent. Besides, crude oil has also shown some negative trades. The Nymex crude oil September futures are currently trading below USD 100 per barrel.

Back on the domestic turf, the mid-cap stocks saw a heavy sell-off on Thursday on rumours that margin calls have been triggered on the stocks of those companies which have shares pledged by the promoters. Most of the sectoral indices closed in the red this week. Realty and CG indices were down heavily by 6.6 per cent each. The power and metal indices were also down by over 4 per cent each, indicating overall negative sentiment on the infrastructure sector. The only index which saw a positive was the FMCG index which was marginal as there were many results from the sector. 

This week saw results from many Sensex heavyweight companies such as BHEL, HUL, Wipro Sterlite, NTPC, ITC and L&T. Besides, Reliance Industries also came out with the Q1 result on Friday last week wherein it posted decline in profit. GRMs were also under pressure. BHEL and L&T have shown good net profit growth though BHEL is still in hot waters due to a lower order book. IT giant Wipro posted 19 per cent rise in the net profit. Sterlite has disappointed with its results wherein it has registered decline in net profit and in the operating margins as well. NTPC has also surprised with YOY rise in the EBITDA margins. On a sequential basis, however, the margins are down. The company has posted 20 per cent rise in net profit which is good for the giant power company. 

Also, pharma company Biocon also came out with its Q1 results. The company’s net profit mainly grew due to the higher rupee depreciation. The company’s fallen EBITDA margin is a cause for concern. Strides Arcolab also came out with positive results today wherein its net profit grew by 32 per cent to Rs 90 crore. We would recommend Strides again as we see huge strength in the business. Today CESC, Alstom T&D, Neyveli Lignite, etc will post their earnings. In the next week there are more companies to report their June quarter earnings, including companies like HDFC, IGL, Gail India, Bank of Baroda and Corporation Bank.

The earnings this season have been quite mixed with upside surprises. The key to the next week’s market will be the RBI’s monetary action even though the market has currently discounted all the negatives that possibly could arise if the RBI maintains a status quo. If, however, the RBI surprises, then we may see heavy positives in the markets as well as in the auto, bankex and realty segments.