Markets in chaos; Time to find the calm?
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Markets globally found themselves in the
midst of a selloff this week, majorly
induced by anticipation of Fed's stance and
the growing concerns in Ukraine over a
potential war with Russia. Moving in tandem,
Dalal Street was painted red as the Indices
began the week with their biggest fall since
April'21. Spills of this bloodbath seeped
over the entire week leading to a drastic
shift in the overall sentiment; from greed
to extreme fear. India VIX also breached the
24 mark for the first time since May'21.
This gruesome market mood is also evident
from the advance-decline ratio of the first
trading session of this week standing at
0.09, which is considerably below the 2021
average of ~1. In fact, the average number
of stocks hitting their 52 week low in the 5
preceding trading sessions rose to 56 as
opposed to merely 19 for the rest of this
month. Supplementing the same, as of 27th
Jan nearly 66% and 48% of the Nifty 500
stocks were trading below their 50 & 200 DMA
respectively, signifying that clean up of
the froth is underway.
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While the market is clouded with uncertainty
and fear, investors should recognise that
these corrections are not unusual. Retail
investors, especially, should brace
themselves for similar market volatility to
persist throughout the year as various
monetary and fiscal policy changes are set
to take effect in 2022. While structurally
the larger bull cycle in India remains
intact, there will be speed bumps on the
way. From a long term perspective,
therefore, these corrections serve as an
opportune time for investors to wisely pick
up stocks of fundamentally sound companies
providing some valuation comfort. Investors
should avoid stocks which have risen purely
on account of euphoria with a deep
disconnect on the fundamental front. Lastly,
investors should keep in mind the advice of
the veteran investor Warren Buffet, who said
"be fearful when others are greedy, and be
greedy when others are fearful." |
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Event of the week |
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To tackle soaring inflation, the Fed
signalled its intention to begin raising
rates as early as March this year. The Fed
further announced reduction in monthly
purchases of securities by an additional USD
30 billion for February'22. The unemployment
rate dipping below 4% to pre-pandemic levels
also prompted Fed to speed up scaling down
of policy support. Separately, it also
specified that the process of balance-sheet
reduction will begin once it has commenced
hiking interest rates. Although, the Fed
maintained policy rates constant this time,
the hawkishness in its stance spooked the
markets globally. Back home, the accelerated
tapering and the potential rate hike can
dampen the foreign funds flow into our
markets. While India is in better position
currently as compared to the Taper Tantrum
during 2013, heightened volatility following
interest rate hikes cannot be ruled out.
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Technical Outlook |
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Nifty closed negative for the week and is
trading around its 100 day EMA on the daily
chart. The recovery in the last trading
session indicates that the index seems to
have found a cushion at the previously
established demand zone of 16,850. The Bank
Nifty index is also bouncing from the
short-term averages on the daily chart.
These pieces of evidence are hinting at the
continuation of the major uptrend. We
suggest traders maintain a bullish bias as
long as the Nifty does not fall below
16,850. However, a break below the same can
trigger a fall up to 16,000 levels. The
immediate resistance for the index is now
placed at 17,650.
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Expectations for the week |
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The Union Budget will be the talk of the
town and markets can experience whipsaw
movements as market participants react to
the policy announcements. Furthermore, the
automobile sector's monthly sales data are
certain to catch the eye of investors
looking to estimate future trend in auto
stocks. With the Q3FY22 earnings season
currently in full gear, investors may expect
some stock-specific swings to add to the
mood in the short term. With an
action-packed week ahead, investors should
avoid aggressive bets and keep their money
ready for deployment on any deeper panics.
The Nifty50 closed the
week at 17,101.95
down by 2.92%.
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Has the pre-budget consolidation begun? |
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After a quick climb to 18300, Indian bourses
appeared to be recouping their breath this
week. Global peers have been facing
corrections since quite some time now and
spooked by rising bond yields and oil
prices, it seems that our markets are now
echoing the global sentiment. The looming
triggers can be largely attributed to the
surge in the US 10-year treasury yield and
India's 10-year government bond yield,
hitting their highest in two years at 1.90%
and 6.68% respectively. This hints to the
markets pricing in a rate hike by Fed sooner
than expected. Moreover, the woes pertaining
to inflation exacerbated as the benchmark
oil prices shot up past $89 per barrel,
their highest level since 2014. As the
budget approaches, these tremors in the
domestic markets are expected to continue in
the coming week as well. History suggests
that in 7 out of the last 10 years, Indian
indices have delivered negative returns or
remained range-bound in the week preceding
the budget.
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As the countdown to the budget has begun,
market participants will try to envisage the
reforms and measures that could feature in
this year's budget. According to market
expectations, the government will likely
maintain its thrust on capex spending with a
significant focus on growth-supportive
expenditure in public and private sectors.
Looking at the current economic scenario,
the budget could initiate more beneficial
programmes for rural segments, SME and MSME.
Sectors such as trade, hospitality & travel,
auto & logistics, communication, have all
been severely impacted by the pandemic and
are still struggling. Expectations are that
these sectors may receive preferential
consideration. Furthermore, if the
government reveals a structured approach for
expediting asset disinvestment and
monetization, the stock market may become
enthusiastic about it. |
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Event of the week |
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India's telecom subscriber base enriched
marginally to 1,197.05 million, according to
Telecom Regulatory Authority of India (TRAI)
data released for Nov'21. The industry
witnessed a growth in the country's overall
wireless subscriber pack at 1,167.50
million, a net customer gain of 1.2 million
with a monthly growth rate of 0.10%. To
support the ailing telecom sector, the
government had in September already
announced measures which can ensure the
industry's healthy growth and drive the
proliferation of broadband and telecom
connectivity. Additionally, its recent
actions cement the government's stance of
not letting the industry become a duopoly.
Going forward, the industry eyes better days
on the back of the recent prepaid tariff
hikes of approximately 20-25%. These hikes
aim to uplift the average revenue per user
for companies. |
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Technical Outlook |
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Nifty50 index closed sharply
negative for the week. However, the
benchmark index seems to be finding a
cushion around the 17,500 zone. On the daily
time frame, it has formed a hammer kind of
candlestick pattern around the previous
resistance zone. The BankNifty index as well
has formed a similar pattern around the
20-day moving average. This pattern
indicates a continuation of the ongoing
major uptrend. Having said this, if Nifty
fails to hold above the 17,500 support zone,
then an extension of time and price
correction is likely. Therefore, traders
should maintain a cautious to mild bullish
outlook. The resistance for Nifty is placed
at 18,300 levels.
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Expectations for the week |
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Markets are expected to remain volatile as
arrays of market-moving events are expected.
Early next week, markets around the world
will be dominated by the outcome of the
Fed's meeting. With three or four rate hikes
expected in 2022, investors will be keen to
understand the schedule for first one along
with Fed's stance on balance sheet reduction
and a tight labour market. Furthermore, the
GDP figures for the US are expected, which
may impact market sentiment globally. In the
second half, market players may encounter
whipsaw movements due to monthly expiry,
especially since it is the last expiry
before the union budget. Additionally as
Q3FY22 results unfold, investors may expect
stock-specific action to continue. The
Nifty50 closed the week at
17,617.15, down
by 3.50%.
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Is the Fad Fading away? |
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Indian
indices continued their bullish stance as Nifty claimed the 18000-mark! While the market has been buoyant since
the start of the New Year, it has certainly not been a dream start for the so-called new-age companies. From the
beginning of 2022, these companies have plunged in the range of 0.35% to 16.23%. Ironically, due to the fad around
these stocks, a short-lived FOMO-driven euphoria was witnessed post-listingas investors looked to grab a piece
from this pie. While the new-age companies have promising growth prospects, they continue to burn cash and have no
clear path to profitability. Amid such uncertainties and a higher than normal probability of failure, these
companies knocked on the door of public markets with ginormous valuations. Novice investors, unfortunately, feel
trapped by investing at such pricey valuations. As the returns expected from these companies can be majorly pinned
to them delivering on their promises and their growth ultimately trickling down to profitability, it is important
to ponder upon whether will all these companies succeed? |
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If we
draw a comparison to the dot-com bubble during 2001 when valuations of tech companies were as frothy, at that time
about 40% of the companies in Nasdaq 100 were loss-making. Out of these loss-making ones, only 34% have managed to
survive and less than 10% have outperformed the index over the last two decades by delivering returns higher than
~9.5% CAGR. In India, as the ecosystem of these new-age companies is relatively at a nascent stage, we are yet to
see how many of these already listed and the ones lined up for their public debuts pass the test of time and
succeed. Therefore, a key takeaway for investors is to not be a victim to fad and FOMO. Rather they should pick
out such new-age companies that have strong economic moats, efficient capital allocation and the capacity to
deliver healthy returns as investment candidates. |
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Event
of the week |
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India's
industrial growth, based on the Index of Industrial Production (IIP) for November was a big disappointment at
1.4%, wherein the output of all 3 sectors- manufacturing, mining and electricity declined, indicating weakening of
pent-up demand. Another key macro-economic indicator released this week was the Consumer Price Index (CPI)
inflation number which jumped to 5.59% in December. Though this was lower than what the market was expecting, it
is highest in over six months. While domestic inflation rose, what is rather worrying is the US inflation, which
came in at a four decadal high. This clearly indicates that Fed will remain firm on its hawkish stance. Back home,
the low IIP and high CPI pose a critical situation for RBI to deal with. Going forward, as IIP is expected to
remain weak given the possible slowdown caused by Omicron, RBI will need to balance both growth and inflation in
its February policy and may rather wait to push the peddle on policy rate hike. |
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Technical Outlook |
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Nifty 50 index closed on a bullish note
for the fourth consecutive week, reinforcing the end of the 3 month corrective phase. Nifty Energy and Realty remained the top gainers,
whereas almost all sectoral indices ended in the green. While the resistance of 17,950 has been decisively broken,
the benchmark index now seems to be targeting its previous all-time high. We suggest traders maintain a bullish
bias on the market. Having said that, minor dips cannot be ruled out going ahead and dips around immediate support
levels can be used as buying opportunities. Immediate support for Nifty is now placed around 17,700 levels. |
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Expectations for the week |
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Quarterly results will drive market sentiment and will be the buzz next week as they accelerate. D-Street would be
interested to hear additional management views about the earnings growth trajectory. With the anticipation that
companies would uphold their momentum from the previous quarters into the third quarter, investors may see whipsaw
moves as results surpass or miss market forecasts. Moreover, the quarterly GDP data for China is also expected
next week, which could influence market sentiment globally. Amidvolatility, investors are advised to tread with
caution and consider the company's long-term prospects rather than purely basing their investment decisions on
quarterly performances. Nifty closed the week at 18,255.75, up by 2.49%. |
Will capex spur the rally in 2022? |
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This week while bulls powered through with
renewed optimism, some hesitation was seen
mid-week as investors read into Fed's
hawkish policy minutes. As the Street
searches for catalysts to fuel the rally
this year, it seems that 2022 can
potentially witness the unfurling of India's
much-awaited capex cycle. Historically,
during 2003-07, when India saw one of the
strongest capex cycles, markets zoomed more
than 6x. In fact, sectoral indices such as
banking, auto, metals, capital goods rallied
between 6x to 23x.
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The current economic scenario is quite
similar to the one that existed in the early
phase of the 2003-07 cycle. Infact, some
indicators are even stronger currently. For
instance, corporate Leverage which was
around 1.3x in FY03, post witnessing record
deleveraging stands at ~0.8x in FY21. One of
the key reasons for the sluggish capex
formation in the last few years were the
elevated banking NPAs. The deleveraging has
further led to bottoming of banking net
NPAs, which have now abated to 2.5% from 4%
in FY03. The 14-government led PLI
schemesaggregating to Rs. 3.46 lakh crores
can act as a game-changer to boost the
manufacturing sectors. Even the savings from
tax rate cuts which were earlier utilised
for debt servicing, can now be channelled
into incremental capex. With the revival of
the real estate sector, household capex is
already picking up. Many other factors
including flushing liquidity, low interest
rates, improving capacity utilisations,
significant pick-up in commodity-driven
sectors, suggest that a similar capex trend
can play out now. If India’s dream capex
cycle is actually realised, history suggests
that good wealth creation can follow.
Investors can thus look out for companies
that can benefit from the up-cycle and
invest accordingly. |
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Event of the week |
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This week, Bank Nifty pillared the rise of
the market as renewed interest in banking
stocks was seen. Green shoots have become
evident as 10 out of 13 banks have reported
double-digit loan growth as per the Q3FY22
business updates announced. Earnings
momentum is likely to continue in Q3FY22
from Q2FY22, with Banks reporting higher top
line as a consequence of improving
collection and solid credit growth. Going
forward, the banking sector's quarterly
result will be one to track, since the
updates have heightened hopes for a better
performance in Q3FY22. Further, given recent
events in light of the Omicron variant of
Covid, it will be critical to closely listen
to the management commentary of various
banks on growth outlook and risk
perspective. |
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Technical Outlook |
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Nifty50 closed the week on a
positive note
but on last trading session, the index
formed a spinning top pattern at 61.8%
Fibonacci retracement of the decline from
the top. On the other hand while
Bank Nifty
remained the top gainer among sectoral
indices, the index formed a shooting star
pattern on the daily chart. These formations
indicate that both the benchmark indices
seem to be facing a mild resistance at
current levels. Having said this, the
underlying bullish momentum remains intact
as long as the Nifty does not break below
17,550 levels. We suggest traders maintain a
cautiously bullish outlook, as a fall below
17,750 can lead to a retest of previous
support of 16,850.
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Expectations for the week |
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The Q3FY22 results season will kick off with
large-cap IT firms reporting their results
first. IT stocks in India have outperformed
the benchmark in recent few weeks, fuelled
by anticipation of an uptick in deals and a
resultant robust growth momentum. Margin
outlook, revenue guidance and attrition
numbers will be key monitorables in the
sector. On the macroeconomic front,
investors will be closely watching the
domestic inflation rate along with inflation
figures for United States and China.
Contrary to other central banks, as RBI
seemed confident of contained inflation in
India, a higher than anticipated inflation
would hint towards a hike in policy rates
sooner than expected and cause jitters in
the market.
Nifty50 closed the week at
17,812.70, up by 2.64%.
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New Year, New Highs? |
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The recovery from lows last week set the
ball rolling for a 'Santa Claus Rally' as
sentiments in Indian indices remained
buoyant. 2021 was a phenomenal year with
Nifty50 soaring over 24%.
Interestingly, in
the past 10 years, whenever Nifty has
provided returns of over 15% in a calendar
year, the following year has been a killjoy.
For instance, a 27.70% jump in 2012 was
followed by a muted 6.76% return in 2013.
Similarly with 31.39% returns in 2014, the
next year was a spoilsport and declined by
4.06%. Currently, Nifty50's forward P/E
still indicates rich valuations and over 70%
of the top 500 stocks are trading above
their 5-year average price-to-book ratio.
Does this high valuation signal that history
will repeat itself and investors should be
bearish heading into 2022? Not really!
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India’s narrative is quite strong this time
both in terms of macros and India Inc.’s
fundamentals. The benefits accruing through
government reforms such as PLI, National
Monetization Pipeline, Make in India will
further catalyze growth. GST collections are
near record highs, the shift to digital is
aiding transparency and consistency, leading
to the biggest structural shift towards
organizedway of doing business. The balance
sheet of corporate India has been repaired
and asset quality issues for banks are being
addressed. The deleveraging by companies
paves the way for a capex up cycle and
government spending will lead to its further
acceleration. Continued initiatives by the
government, evolving fundamental prospects,
pickup in demandand favorable sectoral
tailwinds should hopefully lead to the
Indian markets posting healthy returns in
2022 as well. However,as many of these
factors are already priced in the current
valuations, investors should not expect a
one-way rally to the top and should mellow
down their return expectations as compared
to 2021. Betting on the right sectors and a
superior stock selection offering decent
risk reward will help generate alpha in
2022. |
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Event of the week |
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Driven by rising concerns surrounding
Omicron, pharma stocks were in the limelight
with Nifty Pharma outperformingNifty50 not
just this week but this whole month. The
approval of Molnupiravir, an anti-viral drug
claiming to cut covid-related
hospitalization or death risk in half, for
emergency use in India this week boosted
their upward momentum.Earlier this year, 13
companies entered into a non-exclusive
voluntary licensing agreementto manufacture
and supply this pill in India and 100 low
and middle-income countries. While this is
an extremely positive development, the
non-exclusive nature of the agreements
implies that pharma companies will have to
compete to grab a bigger pieceof the pie.
Drugmakers who have backward integration for
Molnupiravir's API and the ability to
quickly put the pill on pharmacy shelves
will have an upper-hand. Investors could,
after taking into account fundamentals, look
to add such stocks in their portfolio. |
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Technical Outlook |
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The
Nifty50 index closed on a
positive note and broke above the falling
resistance line. The next crucial resistance
level is 17,650 and a close above this level
will signal a continuation of the major
uptrend. However, Bank Nifty is still
trading below its crucial resistance zone of
35,800. A failure to surpass this level can
lead to retest of lower levels. As long as
benchmark index is concerned, the immediate
support on the downside is now placed at
17,100. As long as it does not break below
17,100, we suggest traders maintain a
neutral to mild bullish outlook.
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Expectations for the week |
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Domestic bourses could be influenced by an
eventful economic calendar in the first week
of 2022, beginning with auto sales figures,
where a mixed set of numbers are expected.
However, despite the near-term headwinds,
the long-term view is largely positive as
most automakers predict a progressively
improving chip shortage situation.
Additionally, domestic manufacturing PMI
number will also be an important metric to
track. Later in the weekwhen FOMC minutes
are released, Indian markets may move in
lockstep with the global markets as
investors will seek to read between the
lines of the Fed's action plan. Amid
volatility, investors should focus on the
long-term picture rather than the short-term
headwinds and accordingly position their
portfolio.
Nifty50 closed the week at
17,354.05, up by 2.06%.
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Samco Family wishes you a Happy New Year!
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