US financial markets retain bullish advantage from growth comfort and interest rate dynamics against dollar strength
The external impact on India Financial markets is neutral and mixed. The confidence is from sustainable US economic recovery extending support to India capacity expansion through higher domestic consumption and improved exports. The demand-supply dynamics in commodity assets stand in favour to retain price advantage to hold Current Account Deficit and inflation expectation steady for further baby-steps monetary easing by the RBI. The concern however is from the shift of FII appetite to US markets (from EMs) chasing low risk - high reward risk-on asset classes. The fear mitigant for India is the shift of inflows from hot money short term FIIs to sustainable and accelarated longterm FDI/ECB investors. Given the positive outlook on the way forward, FED has already shifted to rate hike cycle in Q4/2015 notwithstanding resistive outcry from the IMF and other developed & emerging economies with 25 bp hike, not to be seen as baby-step at this stage. The expectation in 2016 is for quick shift of policy rate from 0.25-0.50% to 1.0-1.25% corridor by not later than mid 2016.
The fear of unknown is from the Euro zone and China that are in economic struggle despite ultra-dovish monetary support. While the ammunition at disposal is very limited, the extent and duration of retaining the supportive dynamics is not clear. Having said this, it is very low probability of seeing monetary reversal stance in 2016. The impact from here on India markets will be on Rupee price stability keeping short term foreign investors away for now.
India markets in nervous undertone with expectation shift from optimism to hope
India Financial markets fortunes are mixed without clarity eitherway. The strong external tailwind support is now behind with consolation that it may not turn on the head now, at least in H1/2016. The direction bias will be set from developments in the domestic sector. The expected big bang policy reforms didn't materialise and not seen to be forthcoming soon. The shift from optimism to hope has already resulted in sharp unwind of bullish set up since March 2015. The bottom-line for India in FY16 is the downward shift of sentiment from euphoria to optimism to hope. Can the Government restore optimism in 2016 or allow further slippage from hope to disappointment? At this stage, It is good to set the bias for shift from hope to optimism given the positive cues from the external sector on the CAD, Inflation and Rupee exchange rate.
Can India restore GDP growth optimism from 7-7.5% to 7.5-8% in FY17? Can India see soft landing of CPI inflation around 5% in 2016? Can India restrict fiscal deficit at lower half of 3.5-4.0% in FY17? Will India continue to get external support to hold CAD at 1.5-2.0% in 2016? Will Rupee be stable at 66-70 with not more than 3-5% depreciation in 2016? Will RBI get the desired bandwidth to lower the operating policy rate from current 6.75% in 2016? The directional bias on India risk-on financial markets for 2016 will be dependent on outcome from these critical fundamental cues. The worry is that in the absence of strong FII support, upside gains will be shallow while downside risks can run deep! Despite dilution in external tailwind support for India Financial markets, MARKET PULSE continue to retain hope on long term India economic prosperity. The Government has already opened the doors wide for external investors, and working on policy, regulatory and administrative initiatives to make India as "easy to do business" destination. The public investment into core sectors are being beefed up to provide comfort to domestic investors to pad up to build significant size for capacity expansion. It is true that the pace is slow, but need to give benefit of doubt to the intent and sustained efforts to knock out the resistive political hurdles!
What is the take-away? It is not wise to look beyond 3 months, hence there is no strategic long term play for time horizon beyond 2016! It is prudent to stay short sighted and be fleet-footed to either take monies off the table and stop running the losses taking comfort as long term positions. It has been rewarding 2015 for fleet-footed investors (and traders) across asset classes and it shall be so in 2016 as well, looking for long term trend clarity eitherway!
India equity market in sideways mode given the lack of clarity against limited investor support
NIFTY 2015 high of 9119 looks distant away while low of 7539 is at risk in 2016. MARKET PULSE set end of 2015 Nifty focus at 7500/7650-8000/8150, seen as intermediate zone between 2016 big-picture focus range of 7000/7150-8500/8650. Bank NIFTY is also supported now at intermediate zone of 16150/16500-17350/17700. What Next? MARKET PULSE retain outlook (set on 5th December 2015 update) for 2-step strategic buy entry in Nifty at 7680-7715 and 7515-7550 (Bank Nifty at 16500-16650 and 16000-16150) and 2-step short-build zone of 7965-8000 and 8100-8135 (and 17150-17200 and 17450-17500). Given this outlook on India equity, DJIA index is firm with 2015 low of 15370 looks distant away against high probability of 2016 high above 2015 high of 18351. The end of 2015 consolidation outlook at 17000/17350-18000/18350 has held well building steam for shift higher beyond 18350.
The risk on India equity is from FII play when Nifty under pressure below 2015 low and DJIA looking firm for move beyond 2015 high. The flow dynamics will be between sell-on-recovery stance of FIIs and buy-dips support from DIIs, which provide comfort for Nifty stability at 7500/7650-8000/8150 (Bank Nifty at 16000/16350-17150/17500) in Q1/2016. At this stage, MARKET PULSE stay neutral on FY17 shift of NIFTY focus into 7000-7500 or 8150-8650 (Bank Nifty into 15000-16500 or 17500-19000). Government and RBI have to be on over-drive to arrest downside risks on India equity markets on shift into new financial year in the absence of FII appetite in 2016. All taken, it is prudent to stay risk-neutral in Q1/2016 (ahead of Q1/FY17) awaiting better clarity ahead.
India Bond market in consolidation mode from FII appetite shift from risk-on equity to risk-off Gilts
MARKET PULSE squeezed end of 2015 focus on India 10Y yield at 7.70-7.80% (post end of 2015 chase from over 8% to below 7.50%). While retaining bearish undertone, set RBI support at 7.78-7.80% ahead of 2-step 2016 strategic buy zone in 7.72% 2025 bond at 7.83-7.85% and 7.93-7.95% against duration-cut zone of 7.68-7.70%. This outlook was set in traction with US 10Y yield stability at 2.20-2.35% against yield spread of 5.35-5.60%. It was also set as high-risk short-build on India 10Y bond when India-US 10Y yield spread stay elevated at 5.55-5.60% and India 10Y-Repo rate spread at 1.0-1.10%. What Next?
India 10Y bond is under pressure from domestic low demand - high supply flow dynamics and gradual lift-off in US Treasury yield in 2016. There is limited scope for squeeze in India-US 10Y yield-spread below 5.35% despite US 10Y spike into 2.50-2.65% by mid 2016 against stubborn CPI inflation print at upper-half of 5-6% and Rupee downside risk into 67-70. All combined, see good FII appetite in India 10Y bond at 7.80-7.95% (against Rupee value at 67.35-68.85). This FII strategy in 2016 is not bad against 3-5% Rupee depreciation and 12M Libor weighted average not beyond 1.25%. The big-picture DII play (including Banks) will be between duration-cut zone of 7.65-7.70% and duration-build zone of 7.90-7.95%. The strategic traders appetite will be to build shorts at 7.68-7.73% with caution on shorts at 7.78-7.83% and to build long at 7.88-7.93%. It would need supportive RBI (with 25-50 bps rate cut) and neutral FED (with extended pause post 2nd round of 25 bps hike) to get the India 10Y bond focus into 2015 high of 7.45-7.50%. Most will agree that it will be manna from the heaven if it comes true!
Rupee set for repeat of 2015 with downside risk not beyond 5%
Post the USD/INR intra-2015 bull chase from 63-63.35 to 66.85-67.10, MARKET PULSE set end of 2015 focus at 66.20-67.20 in alignment with RBI admin range of 65.85/66.10-67.10/67.35 for end of 2015 close at 66.35-66.85. During this time, 12M $ rallied from set strategic base of 68-68.25 to resist zone of 71.25-71.50 despite time-value decline from 7.5% to 6.25% in traction with 1.25% rate cut from RBI. Rupee value-decay of 5.25-5.50% in 2015 is not bad against average time-premium of around 7%. What Next?
Not withstanding the beneficial impact on Rupee from lower Brent Crude at $35-50, Gold at 1035-1135 and FDI/ECB inflows, the headwind force is severe. The downside risks are from cues around USD strength against major currencies pushing DXY beyond set 2015 strategic resist zone of 100-100.50, squeeze in 12M time-value to 5-5.5% against steady Repo rate at 6.50-6.75% and hardening 12M Libor into 1.25-1.75% in 2016. The PBoC impact on EM currencies will also add to pressure on the Rupee. The flow dynamics has also turned against with FII $ bids in the cash market and risk-off importer demand in the forward market. One can't ignore huge RBI $ appetite when $ supply turns excessive from lumpy inflows. All combined, MARKET PULSE retain set 2016 zoom-in focus at 65.85/66.10-67.10/67.35 and await orderly or one-shot adjustment into 67.10/67.35-68.85/69.10 at start of FY17. Also retain 12M USD/INR strategic focus at 70/70.25-72.50/72.75.
Post the EUR/INR intra-2015 down-hill chase to set strategic base at 69.90-70.15, correction from here held at short-initiation zone of 72.85-73.35 before consolidation at 70.65/71-73/73.35. The outlook for Q1/2016 is for consolidation here tracking EUR/USD play at 1.05/1.0650-1.10/1.1150 against USD/INR at 66/66.20-67/67.20 and stay neutral on breakout eitherway. It may not be sustainable below 69.90-70.15 against possible intra-2016 shift of EUR/USD play into 1.0/1.0150-1.05/1.0650 against USD/INR shift to 67.10/67.35-68.85/69.10.
Commodities retain bearish undertone from demand-supply dynamics driven by weak global economic recovery
Brent Crude extend weakness below set long term strategic base of $37 on intra-2015 push-back from $70. Is it good (and prudent) to chase weakness into (or below) $35-37? While the demand pick up in 2016 will stay muted, the attention will be on the extent of supply squeeze to retain fair value play at $35-50. Having said this, long term hedge demand will emerge on extended weakness below $35-37 to stay risk-off (or neutral with 50% hedge) to mitigate risk from possible relief rally into $48-50. At this stage, big-picture focus is retained at 35/37-48/50 and it would be high risk chase on extension eitherway.
Gold held at strategic base at 1000-1035 post sharp intra-2015 unwind from over 1300 before stability at end of 2015 consolidation range of 1035/1050-1085/1100. What Next? The worst case scenario for 2016 is not seen beyond $950, while best case is seen restricted at $1135-1185. Gold has clearly lost its safe-haven status but seen fairly priced at 950-1000 for 2016 stability at 950/1000-1135/1185.
What is 2016 strategy?
2015 has been extremely good for fleet footed play both for investors and traders. Shift of risk play between on and off and staying neutral at intermediate zone has given good double-digit returns to investors in the OTC markets and triple-digit returns (on the margin) to traders on the ETF platforms, across asset classes. The strategy remains valid for 2016 with review at Q1/FY17. It is caution for passive investors who rode the 2012-2014 bull trend; it is possible that 2015-2017 may turn as consolidation phase before exerting pressure on the 2015 high prints. So, it is loss of time-value against search of sustainable strategic "base" during 2016-2017. All combined, cues are mixed to have "long term" trend clarity eitherway; markets will be volatile, so are the views and trading strategies. It will be game of "wind surfing" for strategic investors/traders to stay in patience for the right wave for entry and plan quick exit before getting knocked out by contra waves. It will be greed to look for 90-100% of end-to-end moves and it would be prudent to stay content with 60-75% of set big-picture focus range. As always, stop loss has to be affordable and to what one can chew! It is good not to be a "boxer" in this market; one unexpected blow can knock out even the best (and the favourite) by an underdog!
Wish you all a very happy and profitable 2016.
Moses Harding
harding.moses@gmail.com
9674734145
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