As expected the markets sold off subsequent to the Union Budget and that to very aggressively and lost nearly 10% during the course of the last week. In the midst of this the results season has also started with first Infosys coming out with results that beat market consensus. The steady language of the management post results also turned out to be reassuring for the markets and the technology sector as a whole.
Over the last couple of days we have now started seeing results season gathering steam with results from a few mid cap companies and two large private sector banks coming out. Market expectations from banking results are pretty high and to that extent one has to watch how the results actually pan out. My key observation from the first two results from the banking pack is that core results are clearly not good with there being pressure on margins. Net interest income is clearly under pressure and reported numbers look strong mainly due to higher other income contributed by treasury gains and fee income. Although fee income is essentially operational in nature, strong trading gains might not be repeated to the same extent. There is also pressure on the asset quality. I think the long term outlook for banking continues to be strong, however in the near term one has to look at credit growth very closely to see when the pick up actually starts. In the absence of a strong pick up of credit demand the Net Interest Margins are likely to come under further pressure.
Results of Larsen and Toubro have also come out today where there seems to be a pressure on topline growth as well as order booking. Given the fact that the large cap capital good sector has been one of the leaders of the current rally, results will be very closely monitored. Due to high expectations from this sector there is the risk of disappointments. Automobile company results should surprise on the positive due to reducing raw material costs and higher growth.
My reading of the markets in the near term is that overall volumes are likely to be subdued given the fact that most people would like to avoid taking large directional calls in the midst of the results season. Individual stocks are likely to react to the results as they come out and this is likely to create a strong divergence in the way individual stocks behave.
The progress of the monsoons will be monitored very closely. In my view the monsoons are not really a game changer towards the way markets will move in the medium to long term, however it does have an immediate impact on rural consumption sentiments. Secondly a poor monsoon can add to inflationary expectations due to expected upmove in the prices of agri commodities. I believe this is the biggest negative of a poor monsoon. However if the monsoon ends up reviving then it will incrementally have an immediate positive impact on the markets as the stock markets had already started building in for a poor one.
Globally also markets are in a consolidation phase (except for the Chinese markets which continue to defy gravity). Results of Financials in the Western economies will be watched very closely to see the direction of improvement and how much of further pain is left to be healed.
Under the circumstances the markets are more likely to be rangebound rather than take any strong direction either ways in the near term. Corporate results of the current quarter are unlikely to provide any strong upward momentum to the markets.
Since the upmove prior to the budget was so strong the consolidation is likely to happen over a few weeks with a negative bias and my guess is that the near term range would be around 3800-4300 for the NIFTY.