Week Ahead: Market rally seen but earnings, elections to weigh
By Tarun Chaddha
13 April 2009 @ 04:29 pm IST
Mumbai - India's market barometer, the Bombay Stock Exchange (BSE) Sensex is expected to
extend its rise into a seventh straight session on Monday, buoyed by improvements in other Asian
markets and positive closings in the West but analysts are advising caution as the corporate
earnings season and the national elections that gets underway this week are expected to weigh
heavily on sentiments.
On Thursday, the benchmark Bombay Stock Exchange (BSE) Sensex closed in the positive zone for
the sixth day in a row, rising a marginal 0.57 percent or 61.52 points to close up at 10,803.86, its
highest close since October 15.
The Indian markets were closed on Friday on account of Good Friday and are expected to mirror the
gains logged by Asian markets on Friday, which rose on the back of $154 billion economic stimulus
package announced by Japan's government and positive economic growth estimates released from
South Korea's central bank.
On Friday, Japan's Nikkei climbed 0.54 percent to 8964.11, China's Shanghai Composite surged
2.70 percent to 2444.23; Taiwan's Taiex soared 2.01 percent to 5781.96; and South Korea's Kospi
advanced 1.50 percent to 1336.04.
Positive closings by US markets - Dow Jones Industrial Average (up 3.14 percent at 8083.38), S&P
500 (up 3.81 percent at 856.56) and Nasdaq (up 3.89 percent at 1652.54) - and European markets -
FTSE 100 (up 1.48 percent at 3983.71), CAC 40 (up 1.82 percent at 2974.18), DAX (up 3.06 percent
at 4491.12), IBEX 35 (up 3.57 percent at 8704.80) - on Thursday (since Friday was closed on
account of Good Friday) are also expected to boost investors sentiment and whet their buying
appetite.
Moreover, with India's inflation rate at an all-time low of 0.26 percent and the industrial production
(IIP) figures for February showing a contraction of 1.2 percent, the third in five months, reflecting a
wider slowdown in investment and consumption, market sentiments are up on hopes that the central
bank would cut benchmark rates further to ease credit flow.

Private equity players, which are increasingly turning towards emerging economies like India to
invest, are also expected to provide the ammunition for a bull-run.
\"Emerging economies have positive growth rates, while the developed peers are lagging in negative
zone. In such times PE players look forward to investing in those economies which can absorb the
shock and reap returns on their investment,\" said Jagannadham Thunuguntla, head (equity),
SMC Capital.
According to Sarah Alexander, president, Emerging Market Private Equity Association (EMPEA),
institutional investors believe emerging markets will continue to present attractive investment
opportunities in the coming year and plan to maintain or expand their exposure.
\"Investors recognize that emerging economies are the only ones still growing, and they also know
that, since private equity deals in emerging markets do not rely on debt, the collapse of the global
leveraged finance markets will not impede deal flow,\" she said.
Agrees Arun Natarajan, CEO of Venture Intelligence. \"In India transactions are in the form of equity
with no debt component. In contrast, the US and the Europe focused funds are more into leverage
buyouts for which they raise bank loans.\"
According to market analysts, the Indian markets could remain bullish on Monday but would cool
down as the week progresses and investors could take flight ahead of the corporate earnings
announcements and general elections.
\"A spate of positive developments have made the market move one-side up for the past five weeks.
This week the bulls might sit back and take rest and consolidate its gains,\" said Rajesh Jain, vice
president of SMC Global.
\"I think the market has run up for the moment... the kind of volatility which was there today is either
seen at the top of the market or at the bottom of the market,\" said Gajendra Nagpal, CEO at
brokerage Unicon Financial.
\"Since the market has risen so much, it could well be the end of the upside. It may correct from here
or move sideways because the factors which were there behind this rally are already discounted and
now elections and earnings will weigh,\" he said.
The markets, Nagpal said, could turn volatile, as investors would be confused whether they should
stay invested or trim exposure in the run-up to the March quarter results and the general elections.

Though investors are bracing for adverse outcomes of the March quarter earnings and political
uncertainty, Nagpal said they are unwilling to let go of the recent fortunes earned during the bull-run.
According to brokerage India Infoline, it saw the upward momentum continuing for a few more days
till it faces a big hurdle.
\"This could be in the form of bad earnings or guidance, unfavorable outcome in the (elections) or
fresh bad news from the global markets,\" the brokerage said in a note.
\"The ensuing results season and general elections will have a major bearing on investor confidence
in the short term,\" it added.
So what are the brokerages advising?
Merrill Lynch in its earnings preview note has cautions investors \"to trim IT stocks ahead of results\"
as it believes that \"the key data point, i.e. Infosys' FY10 USD (US dollar) revenue guidance will
disappoint, where the lower end of guidance could suggest a greater decline than expected.\"
The brokerage has also investors to play safe in the run-up to elections. However, sure-bets are
infrastructure and engineering companies like Jaiprakash Associates and Larsen & Toubro as
infrastructure development is going to be the priority for any government. Other sectors like energy,
banking, retail, aviation and insurance could also gain as \"a Congress or BJP government without
the Left could lead to reforms in (a) privatization and oil reforms (b) banking reforms (c) FDI in retail,
aviation, insurance etc,\" it said.
\"We will see a mixed bag of results as some industry like auto, cement, petrochemical are expected
to report improved QoQ (quarter-on-quarter) results whereas companies in industries like steel,
banking, IT are expected to report weak results. The fear of Third Front government or any
combination with support of Left will last until the new government gets formed in mid May. We
recommend investors to avoid buying at higher levels and wait for a correction,\" advised brokerage
Nirmal Bang Securities.
Analysts are also recommending booking profits or reducing holdings in some of these stocks such
as DLF, Punj Lloyd, JSW Steel, Gitanjali Gems, Sesa Goa, Pantaloon Retail, HDIL and NTPC for
the reason that they still carry risks or uncertainties to their earnings or have seen valuations run up
ahead of fundamentals.

Especially realty stocks are to be avoided as with no sign yet of a revival in property prices (in fact,
many expect a further slide) and continuing funding problems being faced by even the bigger players
like Unitech and DLF, an earnings turnaround in this sector does seem to be a good way away.
Financial stocks especially will also be closely watched this week and the direction of the movement
would depend on US top three banks, Goldman Sachs, JP Morgan and Citigroup, which are set to
announce their earnings on Tuesday, Thursday and Friday. Last week, US stocks jumped after US
bank Wells Fargo said it expects to report a record quarterly profit, strengthening hopes that
deterioration in the financial sector was abating.
Any positive surprises in earnings from them, analysts said, will most likely be interpreted by the
Wall Street and the rest of the world that the worst for the beleaguered US credit market is over.
Other US companies, whose earnings announcements this week are expected to shed light on the
state of the broader economy, are conglomerate General Electric (GE), chip maker Intel Corp., web
search leader Google Inc., healthcare company Johnson & Johnson, transportation companies CSX
Corp and AMR Corp., motorcycle maker Harley-Davidson Inc. and toymaker Mattel Inc.