Latest Indian Share Market Updates & News in Oct 2017

Instead of Following Trend, Follow the Government to Ride the Bull Wave
 
Market celebrations continued post Diwali with government promising to fill up the ammunitions in the war chest of PSU banks' balance sheets so that they can restart aggressive lending to accelerate the economic growth further in the country. PSU Banks' index was up 31% for the current month a sort of record in the history. The concept of mean revision played out, which led to such massive rally. PSU Banks had significantly underperformed the markets in general and were available at December low prices registered during demonetization, plus the sentiments too were bearish and the sector was considered untouchable. These were some of the ideal factors for the investors to take a contra bet and invest, save and except government intervention to boost balance sheet, PSU banks otherwise were available on an average at 0.7 times book, whereas Pvt sector banks were quoting at 4 to 5 times book, a huge disparity. Such being the valuation dynamics, this made a strong case for investment in PSU banks, the government's intervention is an added boost for the long term profitability of the banks. However in the short term, market has over reacted and therefore the sector should be avoided in the near term and let them correct. The chart below depicts the historical evidence.
 
Nifty Today
 
Events of the Week:
 
Quarterly results announced so far portrayed a healthy sign of economic activities and at the same time fears of GST hiccups are put to rest. Cement companies on an average posted 10% volume growth, FMCG leader HUL posted 4% volume growth and 16% rise in quarterly PAT, HDFC posted 20% rise in PAT, whereas Exide Industries posted 25% decline in profits still, all the stock prices moved in a tight range. YES Bank although reported 25% rise in Q2 profits but seen through the lens of RBI, the bank had under reported up to 1 billion dollars of bad loans in previous year which would have reduced previous year's profit by as much as 40%. Such instances reduce the credibility of the bank in the eyes of investors.
 
Technical Outlook:
 
Market is riding the new high wave and is likely to continue with intermittent hiccups with intraday corrections. The correction of almost two months is over the longest since December 2016. On October 10 note we had mentioned "however a decisive close above 10200 will confirm such resumption of the upward trend..", indeed the market moved from strength to strength belying all fears. Traders should ride the wave and go long with tight stops.
 
Nifty Today
 
Nifty 50 Weekly Chart
Expectations for the Week
 
Market seems to have been discounting earnings quickly. Graphite India reported 430% increase in profits but stock price remained in tight range, similarly Exide Industries reported 25% decline in profits still the stock prices did not fall. More or less numbers are in line with market expectations barring some exceptions like Axis bank and Yes bank which negatively surprised the street. The market is in numbers adjustment mode and therefore will trade with a strong bias as numbers so far have been good and are expected be better going ahead.
 
In previous weekly note dt. Oct 10, we had mentioned "NBFCs had a great dream run but now the sector is trading at 4.5 to 5 times book for an historic average of 3. It is better to sell and book profits..." Although market has a long way to go up, but in this process not all shares or sectors will go up in lock step manner. As economy matures and shifts gear, always there will some sectors which will have huge potential and some that have already consummated the growth potential and therefore by definition are richly priced and should be avoided or profits be booked in them. We believe Jewellery as a sector is also richly priced and needs a caution view going forward. In the mean time fresh investments selectively can be made, albeit in a SIP format, but aggressive purchases can be made only if market falls to sudden knee jerk reactions. NIFTY50 closed the week at 10323.05 up by 1.73%.

Liquidity is breeding irrationality in valuations
 
Market continued its buoyant mood during the week on the back of liquidity flows and no negative global clues. IIP numbers threw mixed signals. Although growth in August had increased to 4.3% from a low of 0.9% in July, is a good sign however in the manufacturing sector (13 out of 23 sub sectors ) still reported negative growth -a sign of sluggishness in the sector. Inflation however continued to remain low, below 4% a promising signal for reduction in interest rates in future. On the whole numbers were neutral, neither good nor bad.
 
Earnings season has started with mix results. South Indian Bank, Lakshmi Vilas Bank and Karnataka Bank have reported 96%, 83% and 25% drop in their respective profits on increased provisions for doubtful debts. This is not a good sign at all for the Banking sector. Contrastingly IndusInd Bank reported 24% growth in its profits, an indication that growth is being cornered by pvt sector banks.
 
Events of the Week:
 
US has taken unique decisions potentially having the effect of polarising the world. The Trump administration has pulled out from UNESCO on the pretext of UNESCO is biased against Israel creating religious divide which is against global peace. Renege on the Iran deal is another step threatening the hitherto settled dispute. Such events can silently cause meltdown in equities. Telecom sector is fortifying its long term existence through consolidations. Bharti Airtel acquiring Tata Tele’s 40 million customers at an attractive deal and KKR evincing interest in acquiring Indus Tower are all seismic changes occurring in the telecom space creating opportunity for long term investments.
 
Technical Outlook:
 
Market revisiting previous top of 10178 in Nifty 50 indicates that the correction could to be over as the underlying momentum is driving the market to newer highs. However a decisive close above 10200 will confirm such resumption of the upward trend, till that time it is wait and watch and book partial profits. Open Interests are reportedly low which would indicate that still the market is sceptic and participants are not ready to commit at higher levels. The possibility of market still trading in a range between 10200 on the upper side and 9800 on the lower side is still valid till the time Nifty decisively breaks above 10200.
 
Nifty Today
 
Nifty 50 Weekly Chart
Expectations for the Week
 
Market seems to be mesmerised in festive mood and is overlooking the muted performance of the companies coming out with numbers. Banks considered as the barometer of the health of the economy have delivered pathetic performance especially the smaller ones. IIP number are showing mixed to negative trend and therefore the corporate numbers too should be a mixed outcome.
 
Few sectors that look promising from a one year horizon are Gas and Gas Distribution companies due to govt initiative of increasing the transmission charges by 60% which will substantially boost profitability of the companies. Second promising sector is Agri and Agri Inputs, govt’s mission to double farmers’ income will accelerate given the overhang of elections. Companies in this sector are still fairly valued leaving room for upside potential. Frictions in the Pharma sector are slowly reducing in terms of plant clearances, new product launches, Rupee depreciation and low cost insurance regime recently passed in the US makes a compelling value proposition for the investors with one year horizon.
 
Sectors to avoid and book profits come in the space of Jewellery which trades at 50 times earnings on an average with 10% growth expectations, these looks richly valued with little margin of safety. PEG of 5 is very high valuation for Jewellery sector. NBFCs had a great dream run but now the sector is trading at 4.5 to 5 times book against a historic average of 3. It is better to sell and book profits and shift money to fairly priced companies for superior returns. In the mean time for fresh investments it is still wait and watch.  NIFTY50 closed the week at 10167.45 up by 1.88%.

Corporate Scorecard to decide the direction for the Market
 
Market bounced back during the week on the back of positive global clues especially emanating from the US. The massive tax rate cuts for corporate earnings from 35% to 20% have raised the hopes of accelerated earnings growth for the US economy, the repercussions of which were felt on the Rupee. By the close of the week Rupee did stabilize below 65.50 from a high of 66.13. Considering macro economic factors, it seems more likely that the spree of Rupee depreciation against USD has started and will continue for long time. This will bring respite to export oriented sectors like IT, Pharma, Textiles and Jewellery exporters.
 
Relenting to public backlash due to high diesel and petrol prices, government finally reduced the prices of fuels by Rs 2/-. Ironically the current price of diesel is hovering at an all time high even as the current crude oil price of around 60 USD is way below their peak price of USD 130 per barrel a decade ago. This anomaly in prices of diesel hovering at all time high vis-a-vis low crude oil prices had caused lot of angst amongst the public, but at last the government has responded positively.
 
Events of the Week:
 
RBI refrained from reducing interest rates despite slowdown due to teething issues of GST, in addition factors like lower coal and crude oil production and emerging inflationary tendencies due implementation of 7th pay commission were all factored in before arriving at the neutral policy stance. But as per WTO report, developed economies have grown faster on the back of low to zero interest rates, that being the case, RBI ought to have considered such contemporary evidences in favour of reducing the interest rates thereby reducing the cost of money to kick start the lending wheel in the economy.
 
Technical Outlook:
 
Market has bounced from oversold zones after forming a firm double bottom. Such base formation is critical, now, if however it is breached it will start a deeper downward spiral. But the way market has bounced off from the bottom, it seems the market is getting into a trading range with upper resistance at 10170 and lower range being 9700 in Nifty 50. Market is in neutral zone currently as such no trading opportunity exists when considered form risk to reward ratios.
 
Nifty Today
 
Nifty 50 Weekly Chart
Expectations for the Week
 
Market seems to be gearing up for the quarterly numbers to be announced beginning next week. This quarter would be the toughest and most unexpected one wherein no one will be able to estimate precisely the quarterly scorecard. Market therefore will be reactive in nature which will result in huge volatility in the stock prices. That being so the premium for options would be high compared to past history.
 
The government has woken to the reality- the difficulties faced by the small businessmen are proposed to be taken up in the GST council meeting and hopefully the govt will be proactive in reducing the systemic and procedural difficulties for them.
 
IPO of GIC Re one of the biggest, approximately Rs 11000/- would hit the market. GIC being a monopoly business should be subscribed to given that the issue is fairly priced. The stock must be held with ultra long term perspective for superior returns. In the near term quarterly numbers will provide clues for the market direction. NIFTY50 closed the week at 9979.70 up by 1.95%.