Market course hinges on Union Budget

Spooked by sharp selling from FIIs, negative global cues like continued Covid-19 infections that may delay the economic recovery in some key nations and speculative activities in the US market; markets witnessed one of the worst performances ahead of the Union Budget in the last 15 years during the last week.

The BSE Sensex fell 2,592.77 points or 5.30 per cent to 46,285.77 and the Nifty 50 corrected 737.30 points or 5.13 per cent to 13,634.60. The Nifty Midcap 100 index declined 3.5 per cent and Smallcap 100 index was down 2.33 per cent. It is pertinent to observe that the NIFTY has come off around 1150-odd points from its high point, leading to a near-vertical decline from those levels.

FIIs turned net sellers on weekly basis for the first time since September last year, selling Rs 12,096.69 crore worth of shares in the week ended January 29. It is interesting to observe that DIIs were net buyers on the weekly basis for the first time in the last four months, net purchasing Rs 3,788.98 crore of shares last week.

The previous week's intensity of net selling by foreign investors took many on the Street by surprise, and a below-par Budget could further accelerate profit booking from foreign portfolio investors as they look to momentarily trim their exposure to emerging markets amid concerns over vaccine rollout.

After the hype created by the FM that the Union Budget this time will be one of its kind in hundred years and inklings in the Economic Survey of a pro-reform Budget; expectations are high that the government will deliver a pro-cyclical stimulus to further strengthen the ongoing economic recovery. Murmurs of a likely new tax on the super-rich and cess on corporate earnings to shore up the government's coffers have dampened some of the expectations.

Any changes with the STT or LTCG, or any such expenditure that may be viewed as wastefully increasing the fiscal deficit, will not be taken in a good way by the markets. The slightest of any positive development will see sharp pullbacks. The risk is that expectations are high that the government will find a balance between populism, reform and growth under a weak fiscal position.

After the Union Budget, RBI's Monetary Policy Committee will come out with its last bi-monthly policy for the current financial year on Friday. Markets expect status quo on the interest rate front. However, it would be important to see the commentary on domestic liquidity and its outlook on bond-buying to support government bond yields.

The coming week is going to be one of the most eventful in the domestic market and will, therefore, likely be the most volatile one in recent months as investors will react to the Union Budget, the Reserve Bank of India's monetary policy and December quarter earnings.

Futures & options sector watch

Mirroring the weakness in cash markets and hustled by FII selling; derivative segment witnessed sharp sell off during the settlement week. Traders were seen locking profits at higher level ahead of the outcome of Union Budget 2021. After moving up by 28 per cent in last three series, Nifty was down 1 per cent in the series ended.

On other hand, market wide rollovers stood at 91.5 per cent compared to last two months market wide rollovers average of 93 per cent. The option data suggests that the Nifty could trade in a wider range of 13,200 to 14,000/14,200 levels in next few sessions. In the event of Budget disappointment, the near term downside target to be watched for Nifty is around 13,050 (20-week EMA).

Maximum open interest in Call options was seen at, 14,000, 14,200 and 14,500 strikes; while the maximum open interest in Put options was seen at 14,000, 13,500 and 13,000 strikes. Call writing was seen at 14,200, 14,100 and 14,000 strikes, while Put writing was seen at 13,300, 13,100 and 13,000 strikes. Hefty open interest at 14,000 strike makes it as key psychological hurdle for Nifty.

The Implied Volatility (IV) of calls closed at 23.85 per cent while that for put options closed at 25.79 per cent. The Nifty VIX for the week closed at 24.29 per cent and is expected to remain volatile. PCR OI for the week closed at 1.41. In coming week markets are expected to remain highly volatile as tug of war among bulls and bears are likely to continue.

As stock futures positions have increased, stock specific approach is required. Sectors looking good in the Feb series by rollover positions are Auto, Banking and Capital Goods. Auto stocks, including Maruti Suzuki, Ashok Leyland, Escorts, Eicher Motors, Tata Motors, Hero MotoCorp and Bajaj Auto, would be in focus on the first day of February as automobile companies will release their January sales numbers.

Industry sources predict that the growth in passenger vehicle, medium & heavy commercial vehicle and tractor segments to continue, but 2-wheeler segment may be weak in January. Observers expect the government to allocate more towards infrastructure spending in Budget and do long-term capex in order to revive the economy. L&T, GMR Infra and Cement stocks look good from here on.

PSU stocks could find new attention from market participants if the government-owned firms are pushed to perform in a market-like manner and a clear divestment plan is unveiled in the Budget. Stock futures looking good are Federal Bank, Grasim, HDFC Life, L&T and TVS Motors. Stock futures looking weak are Bajaj Finance, Dr Reddy's, Maruti, Pidilite Inds and GAIL.

Stock picks

TeamLease Services Limited operates as a temporary staffing company and provides solutions to over 3,500 employers for their hiring, productivity and scale challenges. Its services include temporary staffing (or temping), recruitment services, regulatory compliance services, retail learning solutions (RLS), institutional learning solutions (ILS), apprenticeship programme (NETAP), TeamLease Skills University and payroll processing.

A Fortune India 500 company listed on the NSE & BSE, TeamLease has hired 17 lakh people over the last 17 years and has over 2 lakh open jobs every day. The company offers solutions to large, medium and small clients across the 3Es of employment (over 1.5 lakh employees), employability (over 2 lakh students) and ease-of-doing business (over 1000 employers). The company, in partnership with the Government of Gujarat, set up TeamLease Skills University (TLSU), India's first vocational university, at Vadodara.

The company at present has nearly 200,000 associates/trainees in more than 6,600 locations and has till date given employment to over 1.7 million. Use corrections to buy for target price of Rs 4,500 in medium term.

Pix Transmissions Limited is engaged in the business of industrial rubber products. The company's geographical segments include domestic and export. The company offers its products in categories like transmission belts, powerware products and specials.

Its specials product category includes laser guided pulley alignment tool, digital tension meter, belt length measure, pulley gauge and belt angle gauge. Its belt-manufacturing units and automated rubber mixing facility are located in Nagpur. Buy on declines for target price of Rs 425 in medium term.

(The author is a stock market expert. He is former vice chairman of AP Planning Board)