Fundamental

Overview

• The Indian stock markets had a very constructive week, with the NSE Nifty and the BSE Sensex crossing 6000 and 20000, respectively.
  
  

• First of all, the RBI announced further reversal of liquidity tightening measures taken in July. The central bank cut the MSF rate by 50 bps to 9.0% and announced additional repo windows for LAF borrowings.
  
  

• The trade data for September came in ahead of estimates, raising hope of improvement in the Current Account Deficit (CAD) going forward.
  
  

• The rupee continued to improve gradually even as FII flows remained positive.
  
  

• Optimism over Government and RBI measures to address the macro-economic imbalances has been on the rise lately.
  
  

• The decision by the US Federal Reserve last month to defer the start of QE exit and the nomination of Janet Yellen as the next Fed chief have also in part helped the Indian markets.
  
  

• Globally, the focus remained on the US as the lawmakers struggled to narrow their differences over new fiscal budget and the looming debt ceiling deadline. By the end of the week, there was still hope that the two sides will eventually come around to seal a deal on how to avert a debt default later this month.
  
  

This Week's Market Round Up: – Sensex, Nifty rally by ~3.0% each on week...

• The BSE Sensex rose by ~3.0% during the week while the NSE Nifty gained ~3.20%.
  
  

• The BSE Mid-Cap index climbed ~2.4% while the BSE Small-Cap index was up by ~2.70%.
  
  

• The NSE Bank index jumped by ~4.0% while the INDIA VIX closed at ~23.0.
  
  

• DLF, Ranbaxy, Tata Motors, Infosys and BOB were the top five leaders in the Nifty this week.
  
  

• Coal India, Hindalco, Cipla, BPCL and Cairn India were the top five losers in the Nifty this week.
  
  

• Dewan Housing, NCC, Alembic Pharma and JM Financial were the main gainers of the week in the BSE 500 index.
  
  

• Era Infra Engineering, Just Dial and PVR were the notable losers in the broader market this week.
  
  

• In terms of sectors, Real Estate, Auto, IT, Capital Goods, Tyres, Consumer Products, Banks, Textiles and Paints sectors were the main gainers of the week.
  
  

• Airlines, Sugar, Retail and Gems & Jewellery sectors were the notable losers.
  

Market Outlook: Bullish in Short-Term; Neutral in Medium-Term...

• We see Indian stocks being volatile through the end of FY14 due to uncertain macro-economic outlook 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 September 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 125bps MSF cut in about two weeks, 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 September policy review 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 in July is also a 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 our top picks. Meanwhile, tractor growth has been 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 on the Cement sector is bearish as demand is likely to remain subdued till there is a pickup in the overall 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:

• Stability in the rupee, improvement in FII flows, incremental policy announcements and delay in QE tapering by the US Federal reserve had all combined to lend a helping hand to the Indian markets. The September trade data has boosted hopes of a dramatic turnaround in the external balance sheet even as the Government remains committed to fiscal discipline. The latest IIP and inflation numbers will have some bearing on sentiment in the coming week, along with corporate results.
  
  

Technical

Round-up: Strong Rally...

• Nifty saw a very strong rally from 5900 levels to 6100 in last 4 trading sessions. Bulls were in strong hold throughout the week.
  
  

• IT, AUTO and Pharma stocks were strong with banking stocks seeing a recovery. Midcap space has been very active with strong volumes.
  
  

Nifty Outlook: Bullish...

• Nifty is trading above the 9 DMA (5963) and 20 DMA (5944).
  
  

• It has crossed the previous swing high of 5918 and closed above it; confiming a higher high pattern.
  
  

• Relative Strength Index has started rising but Parabolic SAR is below the prices at 5784 levels.
  
  

• Due to the above positive signals we have our Nifty view as “Bullish”.
  
  

• We expect the Nifty to rise to 6140 levels and above that to 6229.
  
  

• Nifty view will be reviewed if it closes below the 20 DMA (5944).