There is a good chance of Indian shares stretching a run of weekly losses into a fourth because of a truncated trading week coming up, but this should be an opportunity for investors to follow smart money and grab some bargains before the market regains poise for another rally.

A series of troubling factors that included a rise in global oil prices, which could jeopardise New Delhi’s growth plans because of the country’s dependence on imports for about 80 per cent of its oil consumption, have contributed to the stock benchmark’s decline — the longest weekly losses in five months.

For the weak-hearted the trend could be unnerving. With the stock markets closed on Thursday and Friday for local holidays in the coming week, and a bank holiday on Wednesday for work related to financial-year closure, settlements of share deals would take longer, adding to the discomfort of investors.

With unseasonal weather damaging crops in many regions, upward pressure on food inflation is a strong possibility unless the government steps in quickly to ensure adequate supplies through imports. Retail inflation has already come off last November’s low and is on the rise, but still within limits. In these circumstances, the rise in global oil prices following geopolitical tensions could make matters more difficult for New Delhi.

The immediate fallout of this scenario is likely to be on monetary policy. After lowering its main policy rate by a cumulative 50 basis points since January 15, the Reserve Bank of India is expected to pause when it meets in early April. This would be bad news for consumption, which remains sluggish, and for the manufacturing sector that is yet to stabilise growth.

Put another way it means that earnings growth of companies will continue to face headwinds, and an expected stronger recovery could be pushed further afield. The drop in share prices reflects the pessimism on this front, a feeling that the markets may have run ahead of its time.

The top-30 Sensex shed 2.8 per cent this week to end at 27,458.64. The widely tracked benchmark has lost 6.8 per cent over three weeks and is down 8.6 per cent from its all-time high of 30,024.74 reached on March 4. The 50-share Nifty has also followed the trend, closing at 8,341.40, well off its record peak of 9,119.20.

The losses could mount to more than 10 per cent from their peaks in the near term, with the earnings parade in April unlikely to provide any respite.

Silver lining

During such times it would be worthwhile to follow the smart money. Foreign portfolio investors are net buyers through the past three weeks, and their total purchases since the start of January are inching closer to $6 billion (Dh22 billion), indicating that they are undisputedly upbeat about the longer term outlook for Indian shares.

In other words, even as a sell-off confronted the markets, including by foreign investors who cashed in profits, there is accumulation happening at lower levels. This trend will gather momentum as prices further come off, according to equity strategist V. Venugopal.

“Much of the consumption tightness came from the government squeeze on spending ahead of the financial year end,” he said. “Come April and you will see the liquidity taps open up, notably on large infrastructure projects like roads and railways.”

In turn, this would provide a thrust to the manufacturing sector, and investors with a longer term vision would grab the opportunity to build a portfolio, he said.

“The first visible sign of an industrial recovery may come from April,” Deutsche Bank analysts Abhay Laijawala and Abhishek Saraf said in a report, as government spending starts to flow and companies exposed to government policy should outperform.

“These include,” they noted, “basic materials providers like Shree Cement, UltraTech Cement, diesel engine manufacturers such as Cummins India, beneficiaries from rail capex (Siemens India) and mining capex (ABB India).”

“Amongst road developers, we like IRB given its competitive edge from strong balance sheet. The new insurance law paves the way for fresh capital into the sector, beneficiaries include Reliance Capital and Max India.”

Be choosy

Given the emerging scenario, such as overstretched balance sheets of some companies and rural incomes set to rise at a slower rate, investors should be careful about picking stocks.

“We would position for a potential recovery in the local economy through high quality financials with a strong liability franchise and manufacturing sectors with low financial leverage and high operating leverage — commercial vehicles, cement and select capital goods are key picks, here,” said analysts Bharat Iyer, Bijay Kumar and Adrian Mowat at JP Morgan in a report.

“We would avoid chasing beta — particularly in segments like low quality financials and infrastructure conglomerates. Note that leverage in the economy remains high and the savings rate is still depressed. So given the modest growth recovery projected, they are unlikely to be able to grow their way out of trouble.”

“We are also underweight consumer discretionary, particularly with a rural bias, given a change in government priorities.”

“Separately we remain overweight IT services and health care. The demand environment, particularly out of the main market — the US — remains solid. We believe concerns on rupee appreciation turning into a headwind are overdone. The central bank has been intervening actively to ensure that the currency remains competitive.”

FDI picking up

Foreign direct investments are picking up faster than domestic investment, with the inflows reaching $45.4 billion in the 12 months ended January 2015, up 33 per cent on year and close to the peak of $46.5 billion for a similar period ended March 2012, according to Morgan Stanley.

Sectors that have seen an increase in FDI flows include retailing, information technology, telecoms, autos, hotels and energy.

“We believe that continued support from policy action that encourages private investments will help to keep FDI inflows robust, and as corporate and bank balance sheets improve, we will see a more meaningful pick-up in domestic investments over the next six to nine months,” economists Chetan Ahya and Upasana Chachra at the US investment bank said in a report. New Delhi has recently raised FDI limits in railways, defence and insurance sectors.

Japan’s Honda Motor Company has decided to invest Rs9.65 billion to expand its overall production in India to 6.4 million motorbikes and 300,000 automobiles. It will raise annual capacity of motorbikes and scooters by a third to 2.4 million units at its factory in Karnataka and boost automobile capacity by 50 per cent to 180,000 units a year at Rajasthan factory. The company also has factories in other states such as Gujarat and Haryana.

Ford Motor Company this week opened a $1 billion factory in Gujarat that will almost double the US giant’s production capacity in India to 610,000 engines and 440,000 vehicles a year. The company, which runs a factory in Tamil Nadu, hopes to triple exports from India drawing on the country’s cheaper costs.

Credit: The author is a journalist based in India