Posted By : Kishore B.S
Nifty Outlook: Volatile with range bound movement
After enjoying a bullish movement in the beginning of the year due to massive FII inflow
and liquidity injection by European Central Bank, from Mid- February we have seen a
range bound movement of Nifty between 5150 and 5500 due to Budget announcements,
lack of policy reforms and uncertainty raised on European Economy. Now, we are
expecting that the outcome of the Budget is likely to start affecting the market. One can
expect the range bound movement to continue but with more volatility.
Since 2000, we have observed movements in the month of May, are influenced due to
monsoon prediction and the impact of the Union Budget, but this year the uncertainty of
Global Economy has also surfaced.
During the past 10 years, the trend in even years for the Indices during the month of May
has been a downward movement for the 1st half of the month and then upward movement
in May 2000, May 2004 and May 2010 and vice versa for the fiscals 2002 and 2006,
whereas, there has been an upward trend in the fiscals 1999, 2001, 2003, 2005 and 2007.
However, for May 2012, it can be expected that the market could have a negative
movement initially due to negative outlook by S&P for the Indian economy and then
recover in the Second half of the Month.
Oil prices: India still continues to resist pressure from US for cutting import of oil from
Iran. India heavily depends upon the supply from oil Iran as it imports nearly 80 % of its
total oil imports from this gulf country. Certainly, this may add to the rise in prices of oil in
Dollar v/s Rupee: Recently S&P downgraded Indian economy outlook to ‘negative’.
This may add pressure on investments leading to depreciation in rupee. Even employment
figures in the US are recovering though below expectations and will add to appreciation of
Impact of various sectors on Nifty
IT Sector: Positive
One can expect IT stocks to outperform in this month. According to Credit Suisse, there
will be a fairly strong correlation between US Dollar/ Rupee versus the IT stock direction
over the next 30 Days. Indian IT stocks are yet to benefit from the fall in the rupee against
US Dollar. TCS, HCL technologies, Mindtree and Hexaware are the picks for buy call.
Union Budget for 2012-13 proposed to revise Customs duty on non-alloy flat steel
products from 5% to 7.5 % that will certainly increase the cost for production in the sector.
This was done to reduce import of steel from China, but iron ore shortage in India will add
to the problems of not only Automobile sector but also Steel industry
Steel Sector: Sideways
Though Indian Steel Companies will benefit from the hike proposed for Customs duty
on non-alloy flat steel products and demand for infrastructure, companies may also face
shortage of iron ore production. Expectation of this sector is of a mixed reaction.
Construction Sector: Positive
Increased limit for tax-free bonds in the infrastructure sector to Rs. 600 billion for 2012-13
is favourable for construction of roads and access to viability funding for irrigation projects
will also be beneficial leading to increased private participation. This will lead to better
performance from companies like L&T and IRB Infra.
Fertilizer industry will benefit from cheaper credit that will be made available and
expectations of normal monsoon. Also reduction in basic customs duty on some water-
soluble fertilizers and liquid fertilizers will lead to increase in their usage leading to better
expectations for revenues and profits.
Oil & Gas Sector: Negative
Supply side constraints from Iran due to pressure from US, low budget for subsidies and
increased cess is likely to increase the cost of oil. The outlook on this sector is reasonably
negative for this month and squaring off the position from companies like Cairn India,
BPCL and ONGC.
Monsoon projection: Indian Meteorological Department has predicted normal monsoons
for 2012-13 and will be 99% of long-term averages (50-Year). Moreover, recently
Government lifted the four year ban on exports of non-basmati rice due to bumper harvest
last year and rainfall consistent with long term averages since 2010. India may emerge as
the second largest exporter of rice in 2012, selling around 7 million tonnes. This news is
positive for stocks like KRBL and Kohinoor foods and expected to rise this month.
Bank of England interest rate decision: 9th May, 2012
European Central Bank report: 10th May, 2012
U.S. Initial jobless Claims: 10th May, 2012
Bloomberg Consumer Confidence (US): 10th May, 2012
U. S. and U.K. Producer Price Index : 11th May, 2012
This new tax proposal has a significant impact on FII. It has already spooked
market sentiment and can hurt foreign investment in Pro-FII country like India.
On the basis of above findings, we expect the market to fluctuate in the range of 4700 –
5200 due to mixed sentiments of the market players. Prediction of normal monsoon is
positive news for the market which the financial market may reflect at the end of the
(Inputs: Mr. Bhavesh Dhanesha, A Stock Market Institute Associate, Bangalore)