MARKET OUTLOOK

Weakness in commodity complex provides some respite: Crude oil prices have corrected by almost 20% from the recent peaks in June following the International Energy Agency (IEA)'s announcement to release a sizeable portion of its oil stock. It is important to note that the IEA in its history has released its stock only thrice before (eg during Hurricane Katrina and the Gulf War) and the crude oil prices had corrected by 20-35% in response to such measures. In addition, the expiry of the second phase of the quantitative easing (QE) programme of the USA and the lack of visibility on QE3 could keep pressure on crude oil prices. Weakness is also seen in base metals and agri-based commodities on account of the weakness expected in demand from China and the developed countries.

But policy inertia remains a key roadblock: While the government was expected to initiate the reformative measures after the assembly elections, the market has been largely disappointed as little has come on plate. The recent increase in the price of fuels (liquefied petroleum gas, diesel, kerosene) though inadequate reflects the positive stance of the government. The decision making seems to have gone into a limbo with the government getting cornered by a slew of scams and the growing pressure from civil society members.

Expect limited support from Q1FY2012 results and global cues: Consensus estimates show that the aggregate earnings growth for the Sensex companies is likely to be limited to high single digits in Q1FY2012 in spite of the expectations of a strong 20% plus growth in the aggregate revenues during the same period. The input cost pressure is expected to eat into the margins and the higher interest burden would also limit the growth at the net profit level. However, it is still not clear to what extent the earnings estimate would be downgraded further, though the monetary tightening is likely to peak in the coming months. Global cues are expected to at best remain mixed with the western economies hitting a soft patch after the strong revival in 2009/2010.

Maintain our view of sideways consolidation: Despite multiple negative factors and sombre sentiments, the benchmark indices have managed to stay within a narrow range for the past few months. After grinding down towards the lower end of the range, driven by macro headwinds, earnings downgrades and rising uncertainty globally, the equity market has recovered some of the lost ground on the back of a steep decline in crude oil prices and weakness in the other commodities accompanied by some policy action to curtail under-recoveries in the oil sector. Going forward, the earnings season and the Reserve Bank of India (RBI)'s policy review towards the end of July will provide cues in the immediate term while in the medium term the movement of crude oil prices, the policy stance of the government and global cues would influence the market's direction.