Local politics to weigh on market in holiday shortened week

Santosh Nair
moneycontrol.com

Indices managed to crawl higher on the week, but buyers appear to lacking in  conviction at higher levels. The 30-share Sensex (17691) and the 50-share Nifty (5366) gained close to a percent each in a truncated trading week. But liquidity, more than anything, will hold the key to further upside, given the worsening macro situation, both locally and globally. The market will be shut on Monday for Eid festival.

The Comptroller and Auditor General's reports on coal block allocation, ultra mega power projects and the Delhi airport on Friday have given fresh ammunition to the opposition against the already beleaguered ruling UPA coalition. This could make it difficult for the government to push through important policy reforms as it tries to defend itself against the latest allegations of corruption.

On Thursday, market regulator Sebi announced measures to revive growth in the mutual fund industry and help companies raise funds faster. By allowing asset managements to reward distributors well enough, the regulator is hoping that the reach of mutual funds can be improved. But unless market sentiment changes for the better, it is hard to see why investors would be eager to invest in mutual fund schemes. The Finance Minister has promised more policy reforms to encourage households to invest a greater part of their savings in financial markets. And while the intent is right, it could take a while for the policies to bear fruit.

The Prime Minister's Economic Advisory Council has forecast a 6.7% GDP growth for this fiscal, but given the ground reality, the market sees the target as being ambitious.

Inflation for July fell below 7%, but it will take at least two more months of data to figure out if inflation is finally under control. The rupee came under renewed attack this week, though it is too early to say if this is the beginning of a slide.

Corporate earnings growth is under pressure, as seen from the first quarter numbers, and some analysts are now penciling in a sub-10% growth in Sensex earnings for the current financial year. That makes the market at roughly 14 times forward earnings look expensive.

On the whole, not a pretty picture, though there will be pockets of outperformance.

Among events to watch out for next week, officials of India and Mauritius will discuss the Double Taxation Avoidance Agreement as they prepare the groundwork for some modification in the Treaty to avoid revenue losses to India.