By MADHUMITA GHOSH
Vice President – PMS & Research, Unicon Securities

The Indian markets at this juncture are facing challenges on the domestic front that include high interest rates and rising inflation. The same has been observed in other emerging markets too. The central banks of different countries have raised their interest rates, but the increase on a basis points level is much higher in India and this is what has been creating challenges. The emerging markets have witnessed other challenges like higher commodity prices too. Even the FIIs who are investing in the emerging markets are not getting the required returns on their investments.

On the Indian front we are almost at the end of the earnings season and it has been observed that although the results are as per the expectations, the guidance given by the companies has been on the lower side mainly because of certain macro factors such as the rising inflation and higher commodity prices. These factors may lead to some margin pressure for the next two quarters. We have not seen inflation taming down and we expect that this will result in another hike of 50 basis points in the interest rates going for-ward. Interest rate sensitive stocks are likely to remain laggards for the next two quarters.

It would be better to stick to sectors like pharmaceuticals and FMCG (food related) which are likely to witness better prospects going forward. At present we believe that the volatile nature of the markets is likely to continue for the next two quarters. It is time we put higher interest rates and rising inflation on the back-burner and move forward and seek triggers that can drive the markets. One of the most important factors is the monsoon which, if normal, will help improve the sentiments. The other trigger is political stability. All such concerns in the market are getting discounted one by one and we believe the markets should not go below 5,200 on the Nifty.

On the macro front, inflation will be on the higher side in the next one quarter or so and if the monsoon is good then food prices may come down. On the fuel front, crude oil has cooled off in the past one month. But the main thing that needs to be seen is whether diesel de-control takes place. If the petrol prices go up further then fuel-led inflation will pitch in with a stronger presence but on a personal level I believe that this inflation should peak out in the next two quarters.

On the global front, a gradual increase can be seen in the US markets and the data points that are released there are also backing this gradual improvement. In terms of a one year perspective we will see a recovery in the US in a gradual manner. But there is still some concern left on the European front and Japan. In the case of the former the pockets will improve but the EU region still remains concern.

Going forward we feel that the market will be range-bound in the scale of 5,200 to 5,700 on the Nifty until concerns of higher inflation and interest rates that are churning in the minds of the investors get toned down. By Diwali we expect to see a 6,000 Nifty provided we witness a good monsoon and the companies show better results from Q2FY12 onwards.

Sectors like IT, pharmaceuticals and FMCG are likely to witness better movement. Once the economy stabilises we can look forward to increasing the allocation to infrastructure and banking. At the present juncture our suggestion to investors is park their funds in well-researched stocks and avoid trading on tips. Follow the macro economic developments and stay invested for a longer term.