Has the pre-budget consolidation begun?

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.

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.

Event of the week

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.

Technical Outlook

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.

Nifty50 Update 21 January 2022

Expectations for the week

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%.

Will capex spur the rally in 2022?

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?

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.

Event of the week

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.

Technical Outlook

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.

Nifty50 Update 07 January 2022

Expectations for the week

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?

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.

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.

Event of the week

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.

Technical Outlook

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.

Nifty50 Update 07 January 2022

Expectations for the week

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%.

New Year, New Highs?

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!

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.

Event of the week

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.

Technical Outlook

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.

Nifty50 Update 31 December 2021

Expectations for the week

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%.

Samco Family wishes you a Happy New Year!