Equities may move in a narrow range

Indian stocks are likely to move in a narrow range, at least during the earlier part of the week, ahead of key corporates' results. Global headwinds will continue to impact the markets' directions here too.

IT bellwether Infosys is declaring Q2 earnings on Wednesday while Reliance Industries is scheduled its earnings' announcement on Sunday. Expectations are not too high from the earnings season as business climate was hurt by domestic interest rates and global economic uncertainty. However, if the results and outlooks by companies are better than the Street expectations, then one could see strong consolidation around current levels.

“The Sensex may keep oscillating mostly within the range seen this year so far for several months, of course with occasional violations on either side,” Bank of America-Merrill Lynch said in its recent report.

Citi, which upgraded India to neutral from underweight, said: “After their fourth worst quarter since 1990, EM [emerging market] equities now price in recession, but not a return to 2008-9. Further volatility is likely in Q4 as the EU debt crisis plays out and on further global growth downgrades. EM equities should rally into year-end on valuations and seasonals; we expect big gains over the next year.”

However, European Central Bank, which kept the interest rates unchanged, had said: “The ongoing tensions in financial markets and unfavourable effects on financing conditions are likely to dampen the pace of economic growth in the euro area in the second half of this year.”

BofA-ML Global Research now estimates 2012 GDP growth to be lower than previously forecast. BofA-ML now estimated the US economy to grow at 1.8 per cent, Europe at 0.8 per cent, the UK at 1.6 per cent, Japan at negative 0.5 per cent and India at 7.5 per cent. It also painted a gloomy picture for 2013. “The outlook for 2013 also remains bleak as US economic growth is estimated at an even slower rate of 1.4 per cent.”

Fitch has revised India's real GDP growth projections downwards to 7.5 per cent and 8 per cent for FY-2012 and FY-2013 respectively from 7.7 per cent and 8.2 per cent previously.

Citi, however, said: “India is the only Asian market where the dividend-bond yield ratio is below its 10-year average. While we stay underweight the market within Asia, we raise India to neutral within GEMs based on its status as a major commodity importer, as prices fall; lower valuations; a short-term peak in rates; and high ROEs.”

Indian companies are seeing accelerated pace of credit downgrades while upgrades are slowing, as pressure on profitability mounts and demand moderates, said Crisil recently.

Crisil's downgrade rate has gone up to 3.1 per cent in April-September 2011, against 2.9 per cent in the second-half of the last fiscal year. The upgrade rate has fallen to 4.6 per cent from 6.3 per cent in the same period.

After downgrading State Bank of India, Moody's has also downgraded the credit rating of 12 UK financial firms including Lloyds TSB, RBS, Nationwide and Santander UK.

Fitch Ratings downgraded Italy and Spain on concern they will struggle to improve their finances as Europe's debt crisis intensifies, while Moody's Investors Service put Belgium on review for a possible cut.