Market sees a positive nuke explosion on Street

8 Sep, 2008, 0134 hrs IST,Payaswini Upadhyay, ET Bureau

Equities appear poised for a surge on Monday after the Nuclear Supplier Group (NSG) on Saturday reached a consensus on the Indo-US nuke deal agreeing on a clean waiver for India, allowing it an entry into the hallowed nuclear club.

Dealers expect the Sensex to surge by as much as 500 points, fuelled partly by short-covering of positions. The next key trigger would be the outcome of the Organisation of Petroleum Exporting Countries (OPEC) meeting in Vienna on Wednesday. In the wake of slowing demand, an economic downturn and fall in crude oil prices, OPEC may decide to trim the supply to avoid a further fall in prices of crude oil.

Although inflation appears to be coming under control, analysts say the volatile macro-economic picture will prevent investors from braving the market. “A gloomy global scenario, tight monetary policy, lower economic growth, impending elections and high fiscal deficit — all these are negative for the performance of the Indian market,” said an Indian Equity Strategy report by Lehman Brothers.

“We believe that inflation has peaked and the Indian market at current valuations is more leveraged to interest-rate falls and less to a growth slowdown,” the Lehman report added.

After the steep fall on Friday, benchmark indices are now at two-week lows. Adding to the macro-economic worries, the rupee weakened further against the dollar on Friday, touching its 20-month low. While the positive outcome of the nuclear deal is a big victory for India, the upside in the stock market will continue to depend on the mood in world markets. A sharp slide in major markets will sour the mood for Indian equities, brokers warn. “We expect the Nifty should be in a range of 4150-4520,” said Dharmesh N Vala of Nayan M Vala Securities. “The surge in the dollar is in the last phase of up-run, and the bull run in the dollar compared with the rupee is just about to end soon around 45.65 levels. We believe every rise above the level of 45.65 is a good opportunity to short dollar or vice versa buy rupee,” he added. Mr Vala said that the dollar topping out will be followed by a surge in FII flows into equities.

Broking firms are advising their clients to take a cautious view in the short term. “We would buy the market aggressively around 12500-13000 levels. In the short term, we would suggest running widely diversified portfolios and raising the weights of interest-rate sensitives, especially banks, at more appropriate valuations,” the Lehman note said.

Meanwhile, in spite of the general sentiment on inflation, government policies continue to hint otherwise. The commodity market regulator on Friday extended a four-month ban on futures trading in soybean oil, rubber, potatoes and chickpeas to cool inflation.

The halt to futures trading in the four commodities has been extended to November 30. However, there is a dissent among market participants on this issue as they feel that there are no conclusive evidences that suggest that futures trading fuels price increases.

While macro-economic conditions, opine dealers, would have the last say in the way Indian equities play out in the near term, a delay in the withdrawal of the monsoon may offer some respite to the beleaguered sentiment. A lazy monsoon is expected to benefit crops in the current kharif as well as in the ensuing rabi season.