Four reasons why May 2012 can be different

Year	Sensex opening value  (1st trading day) in May	Sensex closing value (last trading day) in May	Percentage change
2002	3,338	3,125	-6.36
2003	2,959	3,180	7.47
2004	5,655	4,759	-15.83
2005	6,154	6,715	9.11
2006	12,042	10,398	-13.65
2007	13,872	14,544	4.84
2008	17,287	16,415	-5.04
2009	11,403	14,625	28.26
2010	17,558	16,944	-3.50
2011	19,135	18,503	-3.31

                                        "The market has also shown a lot of resilience. It has not fallen below 5,200, despite avalanche of negative news globally and domestically. We can perhaps see a move back to 5,450 or 5,500 on the Nifty," Chakraborty adds. Mukherjea takes a little long-term view and remains optimistic about the Sensex hitting 19,000 between now and the year-end. What will aid market in May? Clarification on GAAR The first major catalyst to focus on is clearly general anti-avoidance rule (GAAR). It has been an overhang on the Indian market for over a month now. Foreign institutional investors (FIIs) have been complaining and seeking further clarifications. Confusion over GAAR led to FIIs outflows in April. According to SEBI and NSE data, FIIs were net sellers. They sold stocks worth Rs 6.29 billion. Experts expect a positive clarification on GAAR in the early part of May. Chakraborty says, GAAR provisions could be diluted or postponed. “That could be a big relief for the overall market sentiment,” he adds.  Meanwhile, Mukherjea expects clarification within ten days itself. “Between now and May 10, I would expect the Finance Minister to take a position on this subject. I will be very surprised, if we don’t get a positive clarification on GAAR.” The Reserve Bank of India (RBI) has already warned that India’s current account deficit, which widened to 4.3% of GDP in the December quarter, is “unsustainable” and will be difficult to finance given projections of lower capital flows to emerging markets in 2012. Mukherjea says, “Given the state of our current account deficit, given how dependent the government bond market is on FIIs and given the need for foreign capital in the economy, I will be very surprised if the FM doesn’t take the relatively soft line on the tax registration certificate for Mauritius.” Similarly, Adrian Mowat of JP Morgan says, most investors understand the political problems in India, they are aware of the taxation issue and really want a positive or negative clarification on that at some point next week.  Oil prices The second thing to look at would be oil prices. Currently, Brent is trading around USD 119 per barrel. From India's perspective, rising crude oil prices has implication on the trade deficit, and thereby the currency, and also on inflation. India's 2011-12 trade deficit soared to USD 185 billion, partly due to higher oil prices. If crude prices cool off, it will definitely help the Indian market. Mukherjea says, if Brent begins a move towards USD 100 per barrel, it could add another 5-10% to the market. RBI action  In its last policy meet on April 17, the RBI surprised the market and had cut the key policy rates by 50 basis points (bps). However, the apex bank warned that there is limited scope for further rate cuts. Chakraborty says, the Indian central bank has very decisively acted on signaling the reversal of the monetary policy by significant cuts, both in repo as well as CRR. But he thinks because of the overwhelming concern regarding fiscal deficit and GAAR, the market has not reacted to the RBI policy action as it should have.  Meanwhile, Mowat says, very weak economy is prompting the RBI to cut interest rates more than the market expectation. “Looking forward, over the next couple of quarters, we would assume that the redemption in inflation, the slight easier monetary policy will be leading to reacceleration in growth. Equity markets will be looking to discount that,” he elaborates. Post RBI policy, a lot of banks started cutting their lending as well as base rates. ICICI Bank has cut its base rate by 0.25% to 9.75% from 10%. On the other hand, SBI has cut its lending rates in some segments like SMEs.  Chakraborty says, “The impact of RBI action is now beginning to be felt. We see a lot of banks are beginning to cut, not only the lending rates, but also the deposit rate. That will lead to cut in base rate as well which will benefit the corporate,” he asserts. Earnings A lot of listed companies have declared their fourth quarter earnings in April. With the exception of Infosys’ disappointment, the earnings have been, more or less, good in January to March quarter. The downside to earning numbers is fairly limited now. Chakraborty says, the corporate earnings are also looking better. “In Q4, we are seeing lesser number of companies missing the forecast and guidance as compared to the previous two quarters. So, we could be towards the end of the earnings downgrade cycle as well,” he adds. Net-net, in May, there are many catalysts that could trigger upside, with clarification on GAAR being the major one. So, May may bring in some positive news for the investors community. Vini Amesar
vini.amesar@network18online.com