It is extremely unfortunate that 2016 outlook has to go on the "review table" within 2 weeks of trading sessions.
Shift from "something is wrong somewhere" to "something is wrong everywhere" sentiment
MARKET PULSE market outlook stance since mid 2015 was not positive, to say the least. The bullish undertone was reversed at March 2015 high for serious intra-2015 reversal with expectation of formation of strategic base in Q4/2015 for sustainable recovery in 2016-2017. All combined, the investment strategy was to stay largely in cash and short-duration fixed income portfolio. During this phase, Nifty was driven down from 9000-9150 to 7500-7650 and Bank Nifty from 20650-21000 to 15650-16000 before minor recovery to 8000-8150 (16850-17100), seen as make-or-break intermediate resist zone. India 10Y bond yield stayed volatile within set big-picture focus zone of 7.50-7.85% despite 1.25% rate cut in 2015. It is more pain for foreign investors given the 2-step Rupee weakness from 58.35 to 63.20 to 67.70. The last lap from end 2015 to date is at accelarated pace of 2.5% in 2 weeks to the discomfort of short term "carry-trade" importers and "interest-arbitage" foreign currency loans.
The cues in Q4/2015 didn't turn up for better. RBI was seen over-board with its rate cut actions, FED got into rate hike cycle and China stepped up "currency war" to speed-break growth depression. To rub salt into the wounds, big-bang policy reforms in India was not forthcoming with wash out of monsoon and winter sessions of the Parliament. I have been tweeting my concerns on "something is wrong somewhere" syndrome to stay in "sell-on-recovery" mode and now it has turned out to be "something is wrong everywhere" mode to delay (or defer) the shift to "buy-on-dips" mode for strategic play. All combined, the investor sentiment has shifted from euphoria to panic and the mood is down from greed to fear. Cash investors are seeing serious erosion of capital while leveraged investors have gone below the surface struggling for breadth for survival.
It is shift from good to bad to worse with the worst not yet at sight
Global markets are leading the shift to from bad to worst. The shift in DJIA trading range from upper-half to lower-half of 15350-18350 strategic focus in few trading sessions of 2016 sets up the panic mode. It is high probability that long term strategic base of 14850-15350 is at risk. Despite FED shift to rate hike cycle, 10Y bond yield slide from 2.35-2.50% to 1.95-2.10% is from set up of risk-off mode. Gold swift recovery from 1035-1050 to 1100-1150 is the signal for further shift into risk-aversion mode. The sharp decline in Gold from $70 to below $30 signals height of negative outlook on global growth recovery. The impact on DXY is neutral with consolidation at 97-100 for Euro relief at 1.07-1.10. The safe-haven shift to JPY provided accelarated recovery in JPY from 123.50-125 to below 118.50. All these external developments are serious worry for the Indian markets when FII flows set up the directional bias.
It is less said the better on the domestic cues. Fiscal prudence is low priority agenda now against pressure on the revenue and higher public spend to retain growth momentum at 7-7.5%. Inflation outlook is not positive despite "manna from heaven" Brent Crude price. CAD has already seen the best. All combined, FII appetite for India assets will be near zero with high dependence on domestic investors who are already down or out.
In search of the "floor" in India equity market
MARKET PULSE set 2016 Nifty focus 7485/7535-7615/7665 and stood neutral between shift of play to 7000-7500 or 7650-8150 awaiting clarity in Q1/2016 and end of FY16. Bank Nifty focus was set at 15850/16100-16850/17100 before shift into either to 16850-18350 or 14850/15100-16100/16350. It was also expected that Bank Nifty will under perform with most Banks caught between the devil and deep sea - revenue pressures against higher provisions. What Next?
Nifty close below 7485-7535 intermediate support zone provides confirmation for shift of play into 7000/7150-7500/7650. The strategic play remain in sell-on-recovery mode with stop at 7665 in search of base at 7000-7350 for relief recovery with attention at 6985-7035 support. If held here, it would be 1st confirmation for rest of 2016 stability at 7000/7150-8000/8150. Bank Nifty is set for further value erosion below set strategic base at 14850-15000 with stop loss reviewed down from 17150 to 15850 with rest of 2016 focus at 13850/14100-15500/15750. Despite lack of clarity on formation of strategic base at 7000-7150 (and 13850-14100), it would be prudent to churn allocation of portfolio from 75% cash and 25% short-duration fixed income to 25% cash, 50% long-duration fixed income and 25% equity. Will review this stance on Nifty close below 7000, Bank Nifty close below 14000 and 10Y bond yield close above 7.93% (old) and 7.75% (new).
India Bond market is down but not yet out of favour given the support from risk aversion mode
India 10Y Gilt yield is under pressure at 7.75-7.95% (7.72% 2025) and 7.60-7.75% (7.59% 2026) with "carry-trade" in favour of domestic investors. 10Y yield - Repo rate spread of 1.0-1.20% is too good to ignore while India-US 10Y yield-spread at over 5.60-5.75% is not bad for FII investors when Rupee is seen to be in fair-value zone at 67.50-68.85. The concern is from demand-supply dynamics not in favour with huge pipeline supply in FY17 against limited demand. MARKET PULSE strategy is to shift from low to high duration fixed income portfolio while 10Y bond yield at 7.83-7.93% (old) and 7.68-7.75% (new). With RBI monetary policy review turning non-event, attention will be on the 29th February Budget for better clarity. Till then, any relief recovery into 7.72-7.77% (old) and 7.57-7.60% (new) will attract long unwind to create space for pipeline supply at higher yield. The major risk also remains from US 10Y yield hold at 1.95% for shift back to 2.20-2.35% if FED delivers follow-on 25 bps hike in the next FOMC.
Rupee depreciation is at alarming rate with no relief at sight
MARKET PULSE USD/INR outlook was for near term consolidation at 66.20-67.20 in January before shift of range to 67.35-68.85 by end of FY16. The strategy therefore was to hedge 1M imports at 66.35-66.50 and cover 3M exports above 68.50 in alignment with 12M $ at 70.25/70.50-71.50/71.75 retaining short term bias into 72.50-73 by end FY16. While Rupee trading played to the script, the pace was ahead of time. All taken, the hedge theme was to stay risk-off on imports at spot 66-66.20 and risk-neutral on exports at spot 67-67.20 retaining appetite for stretch into 67.60-67.85. What Next? The cues ahead are mixed. The comfort is from DXY hold at 97-100; recent high around 100.50 is expected to stay safe for a while not ruling out extended EUR/USD relief beyond 1.0950-1.1050 to 1.1350-1.15. The concerns are from FII fear and importers panic on Rupee stretching weakness beyond 67.70-67.85 now. It is good to be fleet-footed at 66.85/67.20-67.85/68.20 in traction with 1M $ at 67.15/67.50-68.15/68.50, 3M $ at 68.15/68.50-69.15/69.50 and 12M $ at 71.25/71.50-72.25/72.50. Given the sharp weakness in Rupee at start of 2016 from 66-66.15 to 67.70-67.85, it is important for RBI to restore confidence retaining value at 67-68 and to prevent shift of play to 68-70.
EUR/INR is volatile with back-and-forth moves at set strategic trading range of 69.80/70.15-73.15/73.50 from both ways volatility at 66.20-67.70 and 1.05-1.10. The trading range is meanwhile reviewed at 71.65/72-74.65/75 with neutral bias on breakout direction. The strategy is to stay risk-neutral on exports at 74.65-75 and risk-off on import at 71.65-72.
Wish you have a great week ahead!
Moses Harding
harding.moses@gmail.com
9674734145
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