Fundamental

Overview

• Indian stocks notched modest gains this week (~1.0%) amid mixed economic data and concerns over the US economy. While the CAD data definitely surprised on the positive side along with the monthly auto sales volumes, fiscal deficit and PMIs tempered optimism over economy.
  
  

• India’s CAD in the April-June quarter came broadly in line with expectation at ~USD21.8bn (~4.9% of GDP) compared to ~USD18.2bn in Q4FY13 as merchandise trade deficit widened.
  
  

• Better-than-expected CAD data for 1QFY14 raised the hope of further improvement on the external front. The latest core sector data for August has also come in much better than the previous month.
  
  

• FIIs poured in US$2bn into Indian shares last month after three months of outflows. As a result, the rupee recovered from the record low of ~69 per dollar in late August to ~62.
  
  

• Although the latest fiscal deficit numbers are worrisome, the periodic increases in diesel prices underscore the Government’s commitment to fiscal discipline.
  
  

• Meanwhile, Government bonds gained after the RBI said that it will improve liquidity by buying back debt via open market operations (OMO).
  
  

• In the overseas markets, the US was in focus as it witnessed the first government shutdown in 17 years amid lack of agreement over new budget deal.
  
  

• Talks among the lawmakers and the Obama regime over new federal budget have not made any headway. In addition, the Wall Street is worried over the looming debt ceiling.
  
  

• In Europe, tensions over fresh political turmoil in Italy eased after ruling government won a vote of confidence in parliament. Economic data continued to be positive.
  
  

• Chinese economic reports have been mixed. Markets in China were shut throughout the week on account of public holidays.
  
  

• Separately, the central banks in Europe, Japan and Australia left their monetary policies unchanged.
  
  

• In the currency markets, the Euro firmed up and touched eight-month high against a struggling dollar.
  
  

This Week's Market Round Up: – Sensex, Nifty rise by ~1.0% on week...

• The BSE Sensex rose by ~1.0% during the week while the NSE Nifty gained ~1.30%.
  
  

• The BSE Mid-Cap index climbed ~2.0% while the BSE Small-Cap index was up by ~1.20%.
  
  

• The NSE Bank index jumped by ~3.0% while the INDIA VIX closed at ~26.0.
  
  

• Ranbaxy, Bajaj Auto, Axis Bank, DLF and IndusInd Bank were the top five leaders in the Nifty this week.
  
  

• NTPC, ONGC, ITC, HUL and NMDC were the top five losers in the Nifty this week.
  
  

• BEML, Dishman Pharma, Just Dial, PVR and TVS Motor were the main gainers of the week in the BSE 500 index.
  
  

• Wockhardt, Era Infra, Kingfisher Airlines and Core Education were the notable losers in the broader market this week.
  
  

• In terms of sectors, Airlines, Real Estate, Cement, Tyres, Auto, Sugar, IT and Banking sectors were the main gainers of the week.
  
  

• Healthcare, Power, Gems & Jewellery, Shipping and Paints sectors were the notable losers.
  

Market Outlook: Neutral for Short-Term and Medium-Term...

• We see Indian stocks being volatile through the end of FY14 due to uncertain macro-economic outlook (especially due to a weak rupee) and the overhang of elections. However, in the long-term there could be some recovery once the upcoming Lok Sabha elections are out of the way and the next Government starts to address the imbalances in the economy.
  
  

• While the repo rate hike in the latest RBI policy was led by the central bank’s discomfort with elevated inflation and entrenched inflation expectations, the MSF rate easing was in view of the improving external environment. With the 75bps MSF cut, the RBI has signaled that liquidity tightening will be reversed gradually (which will reduce banks’ financing cost) while the hike in repo rate points towards dominance of inflation as a policy objective at this stage.
  
  

• In the coming months, while CPI inflation could ease from the current level, it would still be high. Also, WPI may face upward pressure arising from weaker exchange rate. Accordingly, while we believe that the MSF rate will be cut further (if INR stability persists), any easing in repo rate during the remainder of FY14 is unlikely against earlier expectation of 50bps cut towards FY14 end.
  
  

• The RBI in its latest policy review has stated that growth continues to be weak amid sluggishness in industrial activity and services. Investments remain subdued and consumption is starting to weaken even in rural areas. However, it is of the view that growth can pick up in the second half of FY14 on better agri output and upturn in exports. Going forward, the inflation trajectory will be a key variable shaping the monetary policy decision.
  
  

Sectoral Outlook: Bearish on BFSI; Positive on IT & Pharma...

• BFSI - We remain bearish on this sector as we expect the short-term pain on the asset quality side to prevail for a while. Liquidity tightening by RBI earlier this year is also a clear negative. Avoid banks.
  
  

• Automobiles - Our outlook is neutral to positive. We expect revival in H2FY14 due to good monsoon, better policy initiatives (road projects getting cleared, FM supervision) and due to election-related spending. Maruti and Wabco are top picks. Meanwhile, tractor growth was strong in Q1FY14 at 21%.
  
  

• Capital Goods - We are bearish on this sector as we do not see revival in the capex cycle in the near to medium term. Tight liquidity conditions and delay in reduction of interest rates will have negative impact on corporate capex.
  
  

• Cement - Our call is bearish as demand is likely to remain sideways till there is a pickup in the economic activity.
  
  

• Consumption - We remain bullish on this space. Volume pick up should materialise going forward, especially on the back of good monsoon and election-centric Government spending.
  
  

• Infrastructure - We are bearish on this sector. Lack of interest from infrastructure players in new projects due to stressed balance sheets and high interest rates, besides delay in land acquisitions and other clearances have hurt viability of projects.
  
  

• IT - We are bullish on this sector as growth in the US economy is picking up and the recent sharp fall in INR vs USD is also aiding overall margins.
  
  

• Real Estate - We are bearish on this sector. Slow demand environment in most markets and delay in reduction of interest rates have impacted sales. Stressed balance sheets of the realty companies have also hit their performance.
  
  

• Pharmaceuticals - Pharma companies continues to do well in the export markets, and the recent rupee depreciation would further help them report better margins.
  
  

Outlook:

• Markets will brace for the latest batch of corporate earnings in the coming days, apart from digesting data on industrial production and inflation. Intermittent policy announcements (from Government and/or RBI) could also sway the markets’ sentiment.
  
  

• Globally, the US will continue to be in the spotlight due to the ongoing political fight in Washington over federal budget. Even if a resolution is reached between the Obama government and lawmakers over budget, the Congress will quickly have to address the issue of debt ceiling.
  
  

Technical

Round-up: Swing on both sides...

• Nifty saw selling pressure in the first half of the week followed by a sharp reversal in the second half. It gave a positive close with gains of 2%.
  
  

• Metals, IT and Pharma stocks were strong while Banking stocks were marginally up.
  
  

Nifty Outlook: Neutral...

• Nifty has reversed sharply and closed above the neckline of the Head and Shoulder Pattern which negates the downside.
  
  

• It has started trading above the 9 DMA (5867) and 20 DMA (5837). However it is still below the previous swing high of 5918.
  
  

• Relative Strength Index has started rising but Parabolic SAR is above the prices at 6013 levels.
  
  

• Due to the above mixed signals we have revised our Nifty view to “Neutral” from “Bearish”.
  
  

• We expect the Nifty to trade in a range of 5700 – 6100 levels.
  
  

• Nifty view will be reviewed if it closes above the swing high of 5918.