Sunday, March 6, 2011

India - Politics: DMK withdraws support; to add fuel to the fire... expect weaker market in short term

DMK withdraws support

to add fuel to the fire… expect weaker market in short term

UPA's problems seem to be getting more complicated. A series of scams led to a public outcry. The face saving exercise started but only after receiving pressure from opposition and even its own allies. Removal of A Raja and investigation action against him has finally led to DMK withdrawing support. Citing the seat sharing dispute in TN assembly election as the apparent reason, the DMK has surprised the UPA by taking this action. The major fallout will be in the number game of UPA. AIADMK can not compensate for the loss as it has only 9 seats in Loksabha against 18 of DMK. In this situation, the UPA has to depend more on SP or BSP which will ask for its share in power, if given a chance to work actively in the Govt. The situation is very liquid and we will be closely watching the same.    

The market has been a victim of a series of domestic governance issues along with international events. After reaching lifetime high in Nov 2010, the Jan-Mar 2011 period has been very tough. The market has corrected by more than 10 % during 2011. First, it was FII outflows to the tune of US$2bn (Jan'11 till date) as the money started moving out from emerging markets to the developed market on the back of an expected economic recovery. The domestic economic data was also not suggesting a favourable picture with falling IIPs, increasing inflation and interest rates, mounting current account deficit and quarterly results being lower than expected.

On the international front, the events in Egypt, Tunisia, Libya and other Middle East countries have increased the Indian crude oil basket again to a US$108 mark indicating a red flag on equity markets world over.

To add to this, the fallout of the DMK withdrawal would again keep pressure on the Indian markets. With the political risks rising we believe that the government machinery will be less inclined to take decision, the direct of impact of which will be on a lot of infrastructure projects that needs green signals. As far as the UPA is concerned, it will be very defensive for some time till the current issues get settled down. We do not expect any major move on issues like FDI, deregulation of diesel prices, any bold measures to cap the fertilizer and fuel subsidies in near future.      

In short term, the market is likely to show weakness. Even though valuations seem to be reasonable (14.4x FY12E Consensus EPS of Rs1,266), the investors will be cautious in investing as the domestic issues like governance; weak economic data will be now fuelled with the new political development. The international scene is also not optimistic with Indian crude oil basket rising above US$108 resulting in weaker equity markets world over.  

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