| Bears Run Riot on D-Street!
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Markets experienced Friday blues with bear crushing grip and erased the long standing gains made till lifetime highs of 18600. Although the sell-off eased a bit as the week passed by, the nervousness among market participants only escalated at the end. FPIs offloaded more than Rs. 15,300 Crs worth of Indian equities in the week signifying valuation concerns, turning markets upside down. The focus seems to be shifting from premium Indian equities to relatively cheaper markets. In addition to this, the cautiousness was heightened by the unenthusiastic response towards India’s largest IPO to date and a resurgence of Covid concerns across Europe. Investor sentiment had turned tepid at the fag end of the second quarter results, post the fanfare in topline growth of companies due to rising demand as economies continue to open up. The result season was mostly divided with companies showing strong signs of demand growth but at the same time high raw material and input costs adding pressure on margins. Highly commoditised and cyclical businesses such as oil and gas, metals etc. saw bumper revenue and PAT growth although most of it was already captured in the price movement. Banks also delivered improvement in asset quality and collection efficiency while autos, chemicals, consumer durables, and FMGC witnessed stress on their margins owing to inflationary pressure. While investor expectations were more or less in line this time, further damage on the margin front is possible in the coming quarters. Companies have begun passing on the price hikes to the consumers to save their margins but the struggle is far from over, so investors must be careful of such stocks and should assess wisely before jumping in.
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| Event of the week |
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| Since over a week, brent crude prices have steeply declined by around 9% from highs of $85/bbl to a low of $77/bbl, at which point it took support and a U turn towards $82/bbl. Any further upside post this steep one day’s move was collectively capped by major economies across the globe. They released millions of barrels of oil from their respective Strategic Petroleum Reserve in anticipation to quell the high oil prices. Such a bold move by the participating nations is expected to put pressure on OPEC and its allies to pump more oil supply to match the ever increasing demand. The volatility in crude is of major concern as it fuels inflation and India, being a major net importer is at risk. The strategy to tame prices seems sustainable in the short term but if OPEC+ fails to join in, the prices could rally even further.
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| Technical Outlook |
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| Nifty 50 index closed strongly negative after volatile trading throughout the week. The index posted the biggest weekly decline in last 10 months and is now trading below the crucial support level as well as the rising trend line, which had been supportive throughout the secular up move. This can be interpreted as the price action confirmation for a pause in the ongoing major uptrend. We suggest traders maintain a bearish outlook on the market as there is downside potential after the recent bull run. A short-covering bounce cannot be ruled out but with further time correction. On the downside, the next major support is now placed at 16500.
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| Expectations for the week |
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| Post Q2 result season, Dalal Street will look towards macros for hints to move the needle in broader markets. Inflation being a key factor will be at the centre of all news in the next two weeks since the RBI MPC meet is scheduled in Dec. Further, a slew of listing flops in IPOs in the coming weeks could also indicate the slow drying up of liquidity from the markets in general. November monthly auto sales number can be a trigger to drive some movement in the coming week. Nifty 50 closed the week at 17026.45 down 4.16%.
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| Is the taper triggering a tantrum, again?
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Markets started off this week with a
positive bias, eventually to give up all the
gains. The benchmark indices have been
languishing more or less since the FED
announced that the bond tapering will begin
as soon as the end of this month. The
million dollar question is whether the
markets indecisiveness is in anticipation of
a Taper Tantrum 2.0? Fortunately, India is
not currently in a precarious position that
it was during 2013 – when the tapering was
initiated by the FED to normalize the
quantitative easing post the 2008 financial
crisis. While India was listed under the
‘Fragile Five’ economies in 2013 as being
one of the most vulnerable to the
consequences of tapering, India now seems to
be in a better shape to tackle the
onslaught. The country’s foreign exchange
reserves are more than 2x as compared to
2013 and stand at a record high of over USD
640 Billion. Few other indicators
determining financial vulnerability such as
external debt as a percentage of GDP,
consumer inflation, current account deficit,
also stand favorably when compared to 2013,
signaling that India may not be fragile
anymore.
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As the probability of there being a
conspicuous fall in the equity markets due
to the tapering is low, the lack of vitality
can more so be attributed to profit booking.
India has been one of the best performing
emerging markets in this year and a slew of
international brokerages have also been
citing that Indian equities are expensive
currently, leading to higher wariness among
investors. This coupled with better
opportunities in the primary markets and
inflation worries appear to be the driving
forces of hesitation in the secondary space.
Having said this, investors do need to be
watchful once FED starts tapering, since
short term corrections can prevail as
liquidity starts drying up.
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| Event of the week |
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The Auto sector was in the limelight this
week as expectations of normalization and a
potential turnaround led Nifty Auto, which
otherwise has been sluggish as compared to
Nifty50,
to rise 0.35% this week while
Nifty50
declined by 1.87%. The management
commentaries of few auto-makers have also
indicated that the worst of the
semiconductor shortage is over and their
future performance outlook seems better
backed by unabated demand and the improving
supply chain situation. While the optimism
among the auto-makers seems reassuring,
inflation may continue to hurt their
margins. Therefore, investors may tactically
place their bets in this sector on companies
with strong earnings and margin visibility
along with resilient balance sheet.
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| Technical Outlook |
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Nifty50
closed this week by posting a strong bearish
candle. During the week, the index made an
attempt to break above 18,120, but failed as
selling pressure rose. Given that the
breadth of the market is weak, it is likely
that higher levels may not sustain. The
benchmark index is now trading around its
crucial support level of 17,700. Similarly,
the Bank Nifty is also trading around the
rising trend line support. We suggest
traders maintain a mild bearish to neutral
outlook to position their trades. A break
below 17,700 may lead the benchmark to test
17,500 levels.
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| Expectations for the week |
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As the result season is through, D-Street
will look for cues from international
factors to decide its movement. In the
absence of any positive triggers, indices
are expected to remain under pressure as the
markets have been embracing a ‘Sell on Rise’
mood. In the coming week as well, stock
specific movements will be more prevalent
than movements in the market as a whole. As
global macros will continue to dominate,
investors should observe FII activity to
weigh the sentiment and adopt a selective
approach rather than venturing in any
aggressive trades. Nifty50
closed the week
at 17,764.80, down by 1.87%.
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| Sectoral Rotation - A Time Tested Strategy!
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This week did end on high spirits but the broader sentiment continues to be directionless as retail investors and FIIs turned prudent over better asset class opportunities other than equities in India and globally. This cautiousness is not new to D-Street and markets have been more or less tepid since beginning of November. However, Nifty Realty and Nifty Auto have climbed almost 5% and 2.5% respectively, in the same short span of time. Sector specific outperformance as compared to Nifty50 has been a repeated phenomenon in the markets. For instance, during the Indian housing boom between 2003 and 2007, Nifty Realty delivered over 71% returns in 2007 as against 53% returned by Nifty 50. In the course of the dot-come bubble, Nifty IT gave astounding returns of over 490% versus Nifty’s 66% in 1999.
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According to Peter Lynch, “If you are in the right sector at the right time, you can make a lot of money very fast”. Time and again due to the impact of economic cycles, some sectors tend to perform comparatively well and thus are capable of beating market returns. This occurrence is not restricted to longer time frames. In fact, sector rotation has been taking place in our markets this year as well. The relentless rally in the benchmark indices has actually been powered by divided participation of different sectors across various time periods. The Jan-March’21 leg of the rally was majorly supported by Nifty Metal (22% returns v/s Nifty 50’s 4.80%) which turned out to be a laggard in July to September’21 (7.7% returns v/s Nifty 50’s 12.4%). Similarly Nifty Pharma, which led April-June’21 rally (15.6% returns v/s Nifty 50’s 5.75%), cracked in July to Sept’21 (0.2% returns v/s Nifty 50’s 12.4%). What seemed like a secular rally, when diagnosed, has been a sequential sectoral run-up and consolidation play. Therefore, positional investors in their quest to generate alpha, should observe such sectoral performances and position their bets accordingly.
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| Event of the week |
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| US retail inflation jumped to 6.2%, the highest in over 3 decades, which sent chills across the globe. The market is now recalibrating its expectations of the FED’s response to the rising inflation as it appears to be biased towards being non-transitory. An anticipated higher quantum of tapering by the FED may lead to emerging markets including India receiving reduced foreign investments. FIIs have already been net sellers in the secondary markets this week. Also, since October, investors seem to be tilting their focus towards non-equity asset classes. According to AMFI, equity oriented MFs saw declining net inflows whereas debt MFs witnessed net inflows as compared to an outflow in September, suggesting increasing allocation to non-equities.
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| Technical Outlook |
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| Nifty50 ended the week on a positive note and formed a strong bullish candle in the last trading session. Throughout the week, the index continued to consolidate between its 20 and 50 DMA, with the 50 DMA emerging as a key support. Bank Nifty, which otherwise was demonstrating weakness, also bounced back from its support at 38,400. As the benchmark is currently hovering around its immediate resistance of 18,120 and as the breadth of the market continues to be indecisive, we suggest traders maintain a mild bullish outlook while keeping a strict stop loss below 17,750. Next crucial resistance is placed at 18,350.
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| Expectations for the week |
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| Given that most of the quarterly results and festive mood is behind us, indices are expected to move sideways. As markets across the world are trying to decode the implications of rising inflation, any intensive selling by FIIs may take Indian indices lower, unless the domestic players provide support. Next week D-Street will also see a slew of new IPOs listing and the sentiment surrounding listing gains continues to remain bullish. Amidst worsening inflation fears, investors are currently advised to use knee-jerk reactions to, at best, cherry pick quality stocks in resilient sectors and invest in staggered manner. Nifty50 closed the week at 18,102.75, up by 1.04%.
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| Samvat 2077 – The Year of Unicorns & Technology
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During this short but action-packed week, D-Street failed to embrace the festive spirit. The week commenced with a spark but quickly fizzled out toward the end. Nevertheless, markets have managed to hit milestone after milestone since last Diwali, despite some trepidation as our economy continues to tackle the pandemic! In hindsight, the pandemic has resulted in several lasting structural changes, the most notable of which being the fast expansion in the Information Technology industry. Businesses across the world have never been more eager to expedite their digital transformation. Technology adoption, which was once restricted to certain industries, has now become mainstream. Earlier technology used to be a support division but now technology is at the core of any company. This transition to online caused fundamental transformations in sectors such as travel, hotels, restaurants, entertainment, and education, to mention a few, with the boom of e-commerce. With expanded internet, smartphone penetration, and 5G modernization in India, there is a tremendous acceleration in the user base of Indian tech-driven fintech, edtech, healthtech and e-commerce start-ups. This trend is also supported by India's rising list of Unicorns, which has resulted in the country having the world's third biggest start-up ecosystem. As a result, it is unsurprising that 2021 presented an opportune time for several such start-ups to make their public market debuts, with Zomato being the trendsetter. This positive reaction to unicorn IPOs might also be an indicator of a structural shift in investors' perceptions of start-ups' growth potential rather than their operational metrics. However, whether or not this shift sustains will be determined only by the ability of these start-ups to deliver on their ambitious promises and eventually expand the wealth of their investors in the medium to long term!
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| Event of the week |
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| The festival of lights has arrived, and with it, the hope for better business for automotive OEMs. Auto numbers did disappoint on a YoY basis with PV being the hardest hit given the ongoing chip crisis followed by two-wheelers witnessing a double-digit decline. But there was light at the end of the tunnel as CVs and three-wheelers saw good traction. Moreover, when compared sequentially, all segments delivered higher MoM growth as OEMs took the matter into their own hands and growth rebounded. The EV segment, in particular, dazzled after hitting a new peak, as increase of EV infrastructure continued to act as a catalyst towards sales numbers. While green shoots have begun to appear, investors may tactically choose to take exposure to auto stocks, keeping in mind the dynamic supply-side disruptions currently underway.
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| Technical Outlook |
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| After two weeks of sharp decline, the Nifty50 index closed mildly positive and is 0.89% up as compared to last week. However, the index continues to trade under pressure and is likely to do so as long as it remains below 18,000, which is the immediate resistance level. A break below 17,600 may trigger a retest of the crucial support level placed at 17,350. We maintain a bearish bias on the markets in the short term at least, till the immediate resistance level isn’t broken.
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| Expectations for the week |
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| Given a spate of major economic data releases and the current earnings season, the volatility experienced this week is expected to continue into the following week. Inflation figures for the United States and China will influence global markets. As inflation continues to be an overhang, even D-Street investors will be watching the domestic inflation rate closely, which until now has been within RBI’s comfort zone. However, having an inflation rate sustainably higher than its tolerance threshold coupled with interest rate hike calendar adopted by the FED in its meeting this week, may nudge RBI to adopt a hawkish attitude and begin policy tightening sooner than expected. Nifty50 ended the week at 17,829.20, up by 0.89%.
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