Markets likely to remain firm; ECB meeting, PMI data, auto sales to offer cues

All eyes next week will be on the Supreme Court decision to declare the coal blocks allocated since 1993 as illegal. This would be the first acid test for the Narendra Modi government as the markets would want to see how the government reacts and resolves the matter quickly.

There are a few options before the court, which can partially or completely scrap allocations or let mine developers retain the blocks after paying a fine.

The stock market continues to touch new highs on sustained capital inflow from foreign institutional investors. In the past two months, July and August, foreign portfolio investors (FPIs) invested close to $6 billion in Indian equities.

Till the liquidity tap continues to flow, local stock markets won't face any problems and will remain buoyant. The equity market is likely to remain firm on the back of positive macro and micro developments like the fall in oil prices, a stronger rupee and impressive first quarter (Q1) GDP numbers.

For Q1 2014/15 GDP grew 5.7 per cent, its highest in nine quarters. Last quarter (Q4 2013/14) GDP had recorded growth of 4.6 per cent. The low base helped GDP to grow, but it looks unlikely that the government may continue to spend and makes investment for further pushing growth as it can't lose sight of the fiscal deficit target.

The market has discounted that the economy will not show any huge improvement in next 15 to 18 months. The market will react positively following news that the government's disinvestment programme will start in next two-three months. Meanwhile, investors will watch out for the European Central Bank meeting on Thursday, September 4, where it will make a decision on further quantitative easing.

There are expectations that the weak health of euro-zone countries will prompt the ECB to pump more money into the zone. This will, in turn, lead to more liquidity flow into emerging markets like India.

At home, the Sensex is scaling higher, but there are no more low-hanging stocks in the market. The market is not cheap despite stocks being fairly valued. Investors should buy quality stocks and should stick to companies that are generating cash and are debt-free.

Seeing the trend in the market, investors, especially foreigners as well as institutional players, are sticking to select IT and pharmaceutical stocks and are moving in and out of these stocks depending on valuation, but these quality stocks are being paid a premium.

Select pharmaceutical and IT stocks like Lupin, Sun Pharma and Tech Mahindra have jumped between 30 and 40 per cent after election results, while the Sensex has gained close to 11.5 per cent.

In the coming week, HSBC manufacturing PMI and services PMI data will be keenly watched. Monthly automobile sales and cement numbers for August will also be unveiled during the week.