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The Week Ahead: Stocks, rupee and investor sentiment to turn bullish

The markets now seem to sense the return of “Risk on Trade” as money returns to riskier asset classes with emerging markets set to be key gainers.

IMF managing director Christine Lagarde gives a speech at a special forum preceding in Tokyo.
IMF managing director Christine Lagarde gives a speech at a special forum preceding in Tokyo.

The sharp rebound in stocks, rupee and investor sentiment would sustain in the week ahead as it comes in the backdrop of extreme pessimism, low expectation but better fundamentals. The rally also signals the “Bullish Flag’ to the Prime Minister on his assuming charge of the Finance portfolio, with market expecting more from the Expert Economist to turn the weakness in the economy around.


Technically, the Nifty has broken the right shoulder at 5240 on the inverted “Head and Shoulder” formation and now seems poised to test the February highs of 5600 in the near future. Similarly, the Bank Nifty, which has broken the right shoulder at 10300, will now test the February highs of 11200.


The markets were pricing in all negatives and wanting to head higher, mainly on the back of low oil prices, improvement in sentiment and expectation of positive “Rejig “at the Center. Globally, also oversold markets bounced back strongly with most indices at 1 month highs.


The new “Rejig’ finance ministry sounded positive on GAAR modifications, expectation of redressal of retroactive tax amendments, better handling of finances and reduction in subsidies. The same helped the rupee recover to close at 55.6050/6150, rising 3.1 per cent over its previous close. It rose 2.7 per cent in this week, marking its biggest weekly gain in over two and half years. However, it had the worst quarterly close in the last 17 years.


The markets now seem to sense the return of “Risk on Trade” as money returns to riskier asset classes with emerging markets set to be key gainers. Globally, we finally saw a strong Euro rally and the US dollar finally succumbed to strong profit booking on the back of EU stepping in to bring stability in the Eurozone with certain direct Bank funding proposals.


The Nifty has been one of the best performing indices in Asia in the last three months even though the macroeconomic data emanating from India is the worst in last 10 years. This highlights that the markets tend to discount bad news faster and are now indicating that in the next 6 months, we could see substantial improvement in the macro environment on the back of low commodity prices and reduction in interest rates.


The Nifty ended the week up 2.69 per cent- its highest close since 20th April 2012, while the high beta “Bank Nifty “ended up 3 per cent. Friday also saw oil prices rallying 9 per cent as it recovered from huge oversold territory on the back of weakness in the dollar.


The under ownership of equities could see more money shift from bonds, gold as valuations and fundamentals seem to favour stocks in the medium to long term. Another positive was the breadth and sectoral churn being witnessed with high beta stocks finding favour at the cost of defensives and more participation in midcaps.


Factors to Watch:


1. Sustainability of the rally, both in stocks and the rupee


2. Oil rally –Does it have strength?


3. Will the PM stand up and deliver?


4. Corporate results will decide the trend

(Sanjeev Bhasin is an independent investment advisor based in New Delhi and an expert on NDTV Profit’s daily show ‘Buy or Sell’).