Fundamental

Overview

• The Indian stocks notched modest gains in holiday shortened week. Trading was a little muted due to Christmas holiday on Wednesday and extended year-end break in leading overseas markets. But FII inflows remained positive, taking the figure for December past US$2.50bn and YTD inflows to US$20.0bn. FIIs have been net buyers in almost every session so far this month.

• Politics continued to be in the spotlight, with new party “AAP” proposing to form the government in Delhi. A lot of stock-specific action was seen in the broader markets, which managed to outshine their frontline counterparts.

• Global markets extended the so-called Santa Clause rally led by the US stocks. The US President Barack Obama signed a bipartisan budget deal, raising hope of sustainable recovery in the world’s largest economy. In terms of data, the US jobless claims fell while the holiday retail sales increased. The US 10-year Treasury yield hit 3%.

• Elsewhere in the world, the Chinese money market witnessed fresh stress amid media reports that its economic growth is likely to come in at 7.6% this year. The Brent crude oil hit a two-week high near US$112 on South Sudan supply concerns. Japan's Nikkei stock average climbed above 16,000 to touch a six-year high even as the yen weakened to a five-year low versus the US dollar.

This Week's Market Round Up: – Sensex edges higher in thin trading week...

• The BSE Sensex and the NSE Nifty rose by ~0.50% each during the week.

• The BSE Mid-Cap index jumped by ~2.5% and the BSE Small-Cap index was up ~3.50%.

• The NSE Bank index climbed by ~3.10% and the INDIA VIX closed near ~14.60.

• PNB, DLF, Jindal Steel, BHEL and NMDC were the top five leaders in the Nifty this week.

• Hero MotoCorp, Maruti, RIL, HDFC and Lupin were the top five losers in the Nifty.

• Gitanjali Gems, Electrosteel Steels, Welspun Corp, OnMobile Global and Opto Circuits were the top gainers of the week in the BSE 500 index.

• Den Networks, CARE, Elder Pharma, Motherson Sumi and Gateway Distriparks were the notable laggards in the broader market this week.

• In terms of sectors, Gems & Jewellery, Healthcare, Shipping, Hotels, Auto Ancillary and Real Estate were the main winners of the week.

• Beverages and Petrochemicals were the notable losers.

Market Outlook: Bullish in Short-Term; Bullish 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 medium- to 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.

• In its latest monetary policy review, the RBI surprised the markets by holding its policy rates unchanged even as its overall commentary remained hawkish.

• RBI Governor Dr. Raghuram Rajan believes that the lagged effect of previous monetary actions and the disinflationary impact of the exchange rate will help contain inflation going forward.

• Therefore, the RBI’s future course of policy action will hinge on the upcoming data on inflation. The central bank is of the opinion that food inflation (especially vegetable prices) will moderate in the coming weeks. Core inflation (inflation excluding food & fuel) could also ease or remain stable.

• However, election-related government spending could push inflation up. One also needs to keep an eye on the rural wages, which could also head north owing to political considerations. Hence, a 25 bps increase in the repo rate by the end of FY14 cannot be ruled out.

• As far as economic growth is concerned, a convincing and sustainable upturn in the economic cycle is still not in sight. The Lok Sabha elections will be an important trigger.

• On the global front, markets will continue to track the ongoing economic recovery in the US, especially in light of the Federal Reserve’s QE tapering announcement (by US$10bn a month to US$75bn). Going by the muted reaction of the global markets to the QE tapering announcement, it appears that investors will gradually learn to live with the transition.

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 was 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 positive on this space. Volume pick-up should materialise going forward, especially on the back of good monsoon, festival demand 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:

• Expect another lackluster week of trading next week, as market participants will take time to get into the groove post the New Year break. Being the first week of a new month, the markets will track data on Auto sales, HSBC PMI and foreign trade. Global PMI data will also be in focus and so will be the US monthly non-farm payrolls report. Going ahead in January, the Indian markets will brace for the latest quarterly earnings.

Technical

Round-up: Sluggish with a bullish bias...

• Nifty traded in a narrow range due to holidays and expiry. However the last trading session saw some buying to close near the highs of 6313.

• IT and Pharma continued to see the positive trend and banking stocks remained range bound.

Nifty Outlook: Bullish...

• Nifty is making higher highs and higher lows which shows that it is in a uptrend.

• It is also trading above the short term and medium term moving averages which indicates bullishness

• Momentum Oscillator is rising slowly with Parabolic SAR below the CMP at 6123.

• Due to the above positive signals our current Nifty view is “Bullish”.

• We expect the Nifty to rise to 6400 levels and then 6500.

• Nifty view will be reviewed if it closes below the medium term average (6227).