The Week Ahead: Lack-lustre Budget, European Banking Woes to Trigger Further Foreign Selling

The week ahead could see the markets react to further foreign institutional selling, as a lack-lustre budget and risk of underlying European banking woes could force foreigner investors to sell equity.

The markets had seen a sharp rally prior to the budget and were looking extremely frothy around 7750-7800. The deliverance of an average budget with hardly any immediate sops for the markets saw serious unwinding on the budget day itself. The weak European cues added fuel to the fire and the next day we saw the biggest sell figures from the foreign investors and the markets saw their biggest weekly fall in almost 18 months.

The saving grace for the market was the IIP (index of industrial production) numbers which came in after the markets closed. Industrial output in May grew by 4.7 per cent, the highest monthly rise since October 2012, giving further momentum to a 3.4 per cent rise in April and raising hopes of recovery.

If the trend persists, it would contribute to the government's projection of a 5.4 per cent economic growth in 2014-15, after sub-five per cent in the previous two years. However, experts have doubts due to the possibility of a bad monsoon and spiralling inflation.

Quarterly results went underway with better than expected results from Indusind bank and Infosys. The market would look for earnings revival in the broader markets to be cornerstone for any market up-move.

Globally, the correction/consolidation in equities seems to be widespread with most indices seeing weakness. Oil prices below $107 were another big positive which went unnoticed due to the budget and global cues.

For the week, the Nifty ended down 3.8 per cent while the BSE Sensex ended down 3.6 per cent. The high beta "bank nifty" was down 7.13 per cent. The recent outperformer index of CNX PSU BANK was down a whopping 11.85 per cent as the budget left uncertainty on PSU bank's capital raising.

Technically, the Nifty gave a trend reversal this week as it violated support of 20-DMA and broke down from a rising wedge pattern. Event of last two trading sessions could be termed as a sell-off and indicates that weakness is likely to continue in the near term. Also, breakdown was seen in Bank Nifty from the recent trading range. Traders are advised to stay on the side lines and wait for Nifty to stabilize around 7380.

Tracking the top 3 Nifty gainers were IDFC, up 10.9 per cent; Sun Pharma, up 4.8 per cent and ITC up 3.7 per cent. The top 3 losers were BHEL down 15.1 per cent, Jindal steel down 13.8 per cent and NMDC down 12.6 per cent.

The recent outperformance of the Indian bourses had seen a lot of froth in the larger market with mid & small cap stocks jumping anywhere from 25-60 per cent in months. This broader market will now see some more serious unwinding with institutional allocation moving from high beta to defensives in the short term. However, for the individual investor the temporary weakness in the markets due to European woes, an average budget and weak monsoon should be an opportunity to buy, as this could be termed as a routine bull market correction and equity outperformance could continue for the rest of 2014.

Sanjeev Bhasin is an independent market analyst. The opinions expressed here are the personal opinions of the author. NDTV is not responsible for the accuracy, completeness, suitability or validity of any information given here. All information is provided on an as-is basis. The information, facts or opinions appearing on the blog do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.