Fundamental

Overview

• The frontline Indian stock indices broke a three-session losing streak on Monday, posting strong gains on the back of a major breakthrough in Iran nuclear talks. Oil prices fell as a nuclear pact between Iran and six world powers eased geopolitical tensions.

• Over the weekend, the US and five other world powers struck an agreement with Iran, whereby they pledged to ease economic sanctions on the Persian Gulf nation in exchange for Tehran’s promise to curtail its nuclear program.

• On Tuesday, the main Indian stock indices pulled back as the initial euphoria over the Iran nuclear deal ebbed. The undercurrent also remained cautious in the run up to Thursday’s F&O expiry, Q2FY14 GDP data and fiscal deficit numbers.

• FII inflows have also moderated somewhat this month after strong inflows of the past two months. In addition, global markets seem to be lacking conviction amid anxiety over the timing of the QE tapering by the US Federal Reserve.

• Although the Indian markets advanced on Thursday, for the November F&O series the BSE Sensex and the NSE Nifty are both down by ~3.0% each.

• Shares of United Spirits declined after Diageo offered to sell bulk of Whyte & Mackay to address UK’s competition concerns. Whyte & Mackay is a subsidiary of United Spirits and supplies whisky and other spirits, including vodka, in the UK.

• Shares of Pfizer India rallied after its Board approved a merger with Wyeth India at a swap ratio of 7:10. Shares of Cairn India came under some pressure after the company said that its Board had approved a share buyback at a maximum of INR 335 a share.

• Shares of Wockhardt slipped on media reports that the USFDA has issued import alert on the company's Chikalthana plant. This is the company's second plant in India to get import alert after Waluj.

• Shares of Power Grid Corporation of India gained after the state-run company said that it will seek shareholders' approval to hike investment limit for the FIIs to 30% from the existing 24%.

• In the US markets, the Nasdaq Composite index topped 4000 for the first time since Sept. 2000. Trading volumes were light on Wall Street this week due to the Thanksgiving holiday of Thursday and Black Friday. World markets welcomed the deal between Iran and major world powers but the initial euphoria faded later. US economic data was mixed.

• Japanese stocks continued to rise due to weakness in the yen versus the US dollar. The yen is down ~ 4% this month versus the dollar. Yields on Chinese government debt touched their highest levels in nearly nine years amid Beijing's relentless drive to tighten monetary conditions.

• In Germany, the biggest political parties agreed to forge a coalition government led by Angela Merkel. The coalition agreed to introduce national minimum wage besides reaching a pact on boosting spending on pensions, education and infrastructure. Meanwhile in Italy, the Senate voted to oust former Prime Minister Silvio Berlusconi following his tax-fraud conviction earlier in the year. The news came after markets closed.

• The pound jumped against the US dollar after the Bank of England said that it plans to curb support for mortgage lending in Britain in efforts to prevent a housing bubble. Data in the UK confirmed that the economy grew by 0.80% in 3Q, driven by the fastest rise in household spending in more than three years.

• Meanwhile, the Standard & Poor’s (S&P) cut Netherlands’ rating to 'AA+' from 'AAA' while affirming the debt rating of Spain at ‘BBB’. S&P boosted Spain’s outlook to stable from negative.

• Street protests against the current government intensified in Thailand although the Prime Minister did manage to win a no-confidence vote in parliament. Thailand’s central bank unexpectedly cut its key interest rate for a second time this year. Separately, Indonesia’s currency extended recent losses after falling to the weakest level since March 2009.

This Week's Market Round Up: – Nifty jumps by 3% on the week...

• The BSE Sensex rose by 1.70% during the week and the NSE Nifty advanced by ~3.0%.

• The BSE Mid-Cap index rose by ~2.10% and the BSE Small-Cap index was up ~1.0%.

• The NSE Bank index surged ~4.50% and the INDIA VIX closed near ~21.40.

• JP Associates, BHEL, L&T, ONGC and Reliance Infrastructure were the top five leaders in the Nifty this week.

• Bharti Airtel, NTPC, Cairn India, Asian Paints and Sun Pharma were the top five losers in the Nifty this week.

• Aban Offshore, Educomp Solutions and Torrent Power were the top gainers of the week in the BSE 500 index.

• Shree Ganesh Jewellery, Gujarat NRE Coke, Wockhardt and Goenka Diamond were the notable losers in the broader market this week.

• In terms of sectors, Capital Goods, Construction, Consumer Durables, Automobiles, Chemicals, Cement, Banks and Energy were the main winners of the week.

• Airlines, Healthcare, Gems & Jewellery and Paper sectors 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 noted that the industrial activity has weakened on the back of a contraction in Consumer Durables and tepid growth in Capital Goods. However, strengthening export growth and signs of revival in some services, along with the expected pick-up in agriculture could lead to improved growth in H2FY14. The RBI also predicts that revival of large stalled projects and the projects pipeline cleared by the Cabinet Committee on Investment (CCI) could boost investments. The central bank sees FY14 GDP growth at 5%.

• On inflation, the RBI said that while food price pressures may ease with the arrival of the kharif harvest and the usual seasonal moderation, overall WPI inflation is expected to remain higher than current levels. Notwithstanding the expected moderation in food inflation, retail inflation (CPI) is likely to remain around or even above 9% in the months ahead.

• As regards the external sector, the improvement in exports over the last two months, coupled with the contraction in non-oil imports, has enabled a perceptible narrowing of the trade deficit with favourable implications for the current account deficit (CAD) going forward. These factors have brought some calm to the foreign exchange market. However, normalcy will be restored to the exchange market only when the demand for dollars from public sector oil marketing companies (OMCs) is fully returned to the market.

• "It is important to break the spiral of rising price pressures in order to curb the erosion of financial saving and strengthen the foundations of growth," the RBI said on Oct. 29. Given that the end-FY14 inflation will likely be above RBI’s comfort zone, further increase in the Repo Rate cannot be ruled out. The central bank could hold short-term rates at the current levels or lower them depending on the trajectory of CPI going forward. Concurrently, the RBI will try to ensure favourable liquidity conditions.

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:

• Over the next couple of weeks, the Indian markets will digest the latest batch of auto sales numbers, besides the government data on foreign trade, IIP and inflation. Apart from the macro-economic numbers, the markets will also look forward to the upcoming policy meetings of the RBI and the US Federal Reserve (Dec. 18). The outcome of vote counts for the assembly elections will also be significant. Overall, the trend in Indian equity indices will remain volatile and rangebound.

Technical

Round-up: Volatility due to expiry...

• Nifty was very volatile this week due to the expiry. After the expiry markets rallied back near its highs at 6175 with the gains of 3%.

• Capital Goods and Metals have been outperforming the market and emerged as new leading sectors.

Nifty Outlook: Bullish...

• Nifty has started making higher highs and higher lows and broken out of a declining trendline.

• It has closed above the short term and medium term moving averages.

• Momentum Oscillators has started rising again and Parabolic SAR is below the CMP at 5972.

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

• We expect the Nifty to rise to retest its life time highs of 6350.

• Nifty view will be reviewed if it closes below the medium term average (6128).