Published on 2/01/2018 4:07:36 PM | Source: Reliance Securities Ltd

Monthly Strategy Update - Reliance Sec

Posted in Special Event Reports| #Special Report #Reliance Securities Ltd

Institutional Equity Research

A Healthy Ride

The year 2017 proved to be promising and ended with a bang for Indian equities, as the benchmark NIFTY recorded a healthy ~29% YoY gain surpassing the psychological 10,000 milestone. Further demonetisation drive in Nov’16 led Indian equities to witness a massive inflow following a remarkable transition from investment in physical assets to financial assets in general and equities in particular. Notably, the DIIs (including MFs) infused US$18bn in 2017, which extended a major support to the market, whereas the FIIs bought equities worth US$7.8bn during the calender year. While earnings growth continued to remain lacklustre due to initial disruptions led by twin reforms (DeMo and GST), positive sentiments pertaining to earnings revival (after fading away of initial hiccups of DeMo and GST) and change in political landscape in the country with increased chances of NDA’s stability beyond 2019 (electoral victory in 6 out of 7 assembly elections in 2017) supported the momentum. Further, sovereign rating upgrade by Moody’s, PSB recapitalisation drive and government’s reaffirmed push for infrastructure creation etc. boosted the investors’ sentiments despite constant deterioration in twin deficits over last couple of months due to spiralling crude prices and domestic inflation.

Earnings Recovery – Key Factor for 2018

Going forward, as the macro issues in terms of higher crude prices, challenges to maintain fiscal consolidation path by the Government, likely reversal of rate cut cycle and geo-political issues are likely to take front seat in 2018, we expect returns to be interplay between liquidity and earnings recovery. However, as moderate recovery in earnings in 2QFY18 suggests that the transient impacts of GST and DeMo are behind, we expect a sharp recovery in earnings on the back of low base and pick-up in rural spending. Given a hefty weightage of BFSI (35%) in Nifty, any development on NPA resolution and PSB recapitalisation front would be the key decisive factor.

Global Bankers Set to Unwind Stimulus Programmes

Global bankers in their policy meetings in 2017 gave enough indications for unwinding of stimulus programmes and supported a gradual rate hikes in coming period. The Fed hiked rate by 0.25% in Dec’17 and flagged chances of three more hikes in each in 2018 and 2019 and thus taking rates to 3%. Further, the ECB also has been hinting for a possible unwinding of stimulus programme due to gradual economic recovery in the European nations. Hence, unwinding of stimulus programme and gradual increase in interest rate may trigger further capital flight from the country.

Deteriorating Headline Data – Reason to Worry

The month gone by proved to be poor in terms of headline data pertaining to CPI, WIP, trade data and fiscal deficit witnessed a marked deterioration. Spiralling crude price and higher vegetable prices impacted inflation, as the CPI-based inflation touched 15-months high of 4.88 in Nov’18. Further, low revenue and high expenditures breached the fiscal deficit target of FY18. Fiscal deficit at the end of Nov’17 reached 112% of FY18 estimated target, which led a spike in G-Sec yield. While we expect crude prices unlikely to breach US$70 mark and reverse in 2018 with the increasing shell oil supply from the US, any further spike in the crude prices may adversely impact India’s economic growth.

Insipid Victory in Gujarat – Increases Chances of Populist Measures

Though BJP succeeded in retaining power in Gujarat, significant decline in rural seats tally vis-à-vis 2012 may warrant the party to revisit its strategy to appease the rural populace in the upcoming General Budget. Despite being detrimental to the economy in general, the populist measures would spur rural spending. Further, the Government may hike the MSPs in ensuing months with a view to meeting its ambitious target of doubling farmers’ income by 2022.

Market Outlook

The formation of important double bottom range in region of 10,000-10,100 levels with other positive technical evidences like holding the 100-day averages and breakout above 10,400 levels confirm a up trend with a target of 10,750 levels for NIFTY. Further, the NIFTY will find strong support around its long-term 20 weeks average placed near 10,200 levels, in case of any decline. The options OI data for Jan’18 are very low as we are trading at an all-time high. Corporate results for 3QFY18 will start from the middle of the month, which will provide a new direction to the broader markets. On the higher side of 10,700-level has an OI positions of 32 lakh shares, while on the downside of 10,300-level has the highest OI positions of 48 lakh shares.

Among sectors, we continue to maintain our bullish stance on IT and Pharma over the next few months, these sectors continue to look promising even at the current levels. Bank Nifty is trading at below 2% from its all-time high as PSU banks are underperforming the broader markets and a breakout in psu banks above 3,800 levels would warrant a swift up-move of 4-5%.

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