Sensex Gets A Boost From Retail FDI Move

It was an eventful as well as a volatile week for Indian equity markets, with the Sensex dancing to the tunes of Indian politics as the fate of FDI in multi-brand retail was to be decided. The NDA-led opposition demanded for a vote on the issue, which kept the market participants on their toes. Finally, on Friday (December 7, 2012), the UPA government tasted victory on the debate, with the Rajya Sabha (supported by BSP) voting in favour of FDI in multi-brand retail.

No wonder then, that the Sensex managed to sustain the positive momentum it had gathered in the past week and closed around a 20-month high. While the Sensex closed at 19424 (up 0.44% in a week), Nifty closed at 5907 (up 0.47%). Though the gain was marginal, the significant factor is that the markets managed to sustain the higher levels.

We are of the opinion that the increased optimism in the market and a sustained up-move on the indices is to due to the regular flow of positive news from overseas and on the domestic front. The increased optimism is clearly vindicated from the fact that already there is a line up for Initial Public Offerings (IPOs) and volumes have also increased marginally on the bourses. This clearly indicates that investors’ interest in the market is continuing to get stronger, which is a positive sign. The best part is that the markets are inching up rationally rather than seeing a sudden up-move, giving chance to every participant. We believe that this sort of a momentum is a sign that the optimism will be sustained.

On the data front, two major economic indicators were announced in the past week for the month of November 2012. While the HSBC Purchasing Managers Index (PMI) manufacturing data was announced on Monday, December 3, 2012, the HSBC PMI Services data came in on Tuesday, December 4, 2012. The manufacturing PMI witnessed a good up-move and stood at 53.70, up from 52.90 in October 2012 (an index reading above 50 indicates an overall increase in manufacturing activity, while one below 50 indicates an overall contraction). The November 2012 PMI manufacturing number has been highest in the past 5 months. Expansion in manufacturing is a positive sign in the Indian context. However, the Services data witnessed a marginal decline and stood at 52.10 against 53.80 in October 2012.

Asian Markets

In addition to the improvement in the Indian manufacturing data, China's PMI data also came in as a positive surprise, which hints that there are signs of recovery across Asia. This indicates that emerging market economies (especially India and China) can help world economic growth get back on the growth track. China’s PMI figure for November 2012 came in at 50.5 against that of 49.5 in October, signalling the first improvement of operating conditions in the last 13 months. This, along with some expectations on the expected stimulus front, resulted in the Shanghai index witnessing a sharp up-move of 4.14% in the past week. A similar trend was seen with the Japanese Nikkei, which witnessed an improvement of 0.86% and the Hang Seng, which moved up by 0.73%.

European & US Markets

In the European markets, despite the ECB revising its GDP growth forecast for the Euro zone downwards by 20 bps to 0.3%, the FTSE, CAC and DAX indices stay in the green. We are of the opinion that continued bond buying held the equity indices strongly up. Further, the cut in the GDP growth rate was already discounted in the markets.

The US markets ended marginally in the negative, with renewed concerns over the fiscal cliff.

Crude & Currency Movement

Crude oil prices witnessed a decline and touched the lowest level in three weeks after the ECB cut its Euro-area growth forecasts and US lawmakers struggled to reach an agreement on a budget plan.

Gold some weakness in the beginning of the week. However, this took a slight rebound as a result of buying at lower levels. There has been a slight increase in demand because of the wedding season as well.

The rupee saw some appreciation against the dollar this week. This was majorly after Moody’s and Goldman Sachs came out with positive reports on the Indian economy in the preceding week. Further, the increased FII inflows (Rs 6007 crore in this week) and clarity on FDI in multi-brand retail were also major positives.

Sectoral Indices & Stocks

While the Sensex has remained a bit range-bound, the BSE Mid-Cap Index witnessed a strong up-move of 4.62%. It is clear that after staying muted for a long period, the Mid-Cap stocks are catching up with the frontline stocks. The BSE Small-Cap Index also witnessed a strong up-move of 3.10%.

Apart from this, sectoral indices like Consumer Durables (up 7.41%) and Realty (up 6.92%) have put in a good show. Improving sentiments on account of an expected rate cut by the RBI is the primary factor driving the realty sector. In the Consumer Durables segment, an improvement in the economic scenario is expected to result in higher disposable incomes, ultimately leading to higher spend on white goods.

In the Automobile sector, despite the muted sales volume for November 2012, the Index is up by 2.42% on account of expected price hikes by major players like Maruti Suzuki and M&M.

On the stock-specific front, Jaiprakash Power Ventures witnessed a strong up-move of 17.83% on account of the clearance of coal mines in Madhya Pradesh. It was followed by Pantaloon Retail, which moved on account of the approval for FDI in multi-brand retail. United Breweries moved upwards as the stock has been included in MSCI India from November 30, 2012.

Speaking of the losers for the week, Hexaware Technologies witnessed a decline as the company revised its fourth-quarter revenue guidance downwards. It now expects revenues for the December 2012 quarter to come in at USD 92 million, down from the earlier guidance of USD 94.7 million-96.5 million.

Next week, we expect the markets to remain in a positive zone. The reason behind our conviction is that the reforms process is expected to continue. Further,  some clarity may emerge as the RBI has indicated some contraction on the inflation front. If inflation declines, it may guide the RBI to cut the Repo rate in its upcoming meet on December 18, 2012. If that happens, the equity market will move into a new orbit.