Indian markets ended marginally lower on Friday with losses of about 0.5%. Weak global markets marred sentiments. Global markets were weak after St. Louis Fed President James Bullard threw cold water on expectations for further Fed easing, saying that, current economic conditions are not weak enough. The continuing stalemate in Parliament in India over the CAG report also weighed on the markets, we believe.

The benchmark indices ended a truncated week almost flat. They gained by between 0.3% – 0.5%. The small and mid cap indices under-performed the benchmarks and were lower by about 0.5% – 1% for the period. However, several of the med-caps did well because of associated triggers. For the week, IT, FMCG and Pharma sectors were the outperformers whereas, the banking index was down on reduced optimism about RBI action on interest rates. The high consumer price index inflation number watered down expectations about immediate rate cuts.

The currency fluctuated in a narrow band during the week. Uncertainties in the global economy and the lack-lustre FII flows over the past few days kept the currency subdued.

The markets have been surprisingly steady and have been moving up slowly despite concerns locally as well as across the globe. China has consistently reported weakening data over the past few weeks.

The situation in Europe continues to be very uncertain, though the chance of catastrophes are lower , we understand. US data has improved in past few weeks, but not significantly. Markets are likely taking heart from expectations that, weak data will lead to quick action from central banks in terms of ensuring liquidity. Thus, every negative piece of data has been met with optimism.

On the domestic front, while monsoon deficit has reduced, other concerns have emerged. Brent crude is trading at about $116 / barrel mark and the rupee has not appreciated by much. Food inflation remains high and retail fuel prices remain suppressed.

Fiscal reforms are awaited by the markets and hopes are high after the new Finance Minister has come in. However, markets are yet to see any concrete initiatives being taken up, though efforts are being made to arrive at a consensus.

The CAG report on coal, power and aviation has resulted in a stand-off between the ruling and opposition coalitions, leading to suspension of parliamentary proceedings. An early resolution to the stand-off and resumption of proceedings is needed, if some of the pending reforms are to be taken up.

We continue to believe, though with lower conviction, that, some of these initiatives will be taken up by the Government, which will likely address the concerns about fiscal deficit, administrative and procedural delays, etc. These are a pre-requisite for the markets to go up sustainable.

Valuations are now at about 14.5x FY13E earnings, which is almost at the median level of the long term band. Risk-averse participants may do well to be slightly under-weight on the markets at least in the near term.

As of now, we continue to maintain our bias towards companies with able managements, strong balance sheets and reasonable valuations.