India Equity Market : Mid 2015 review

Shift from roller-coaster ride to stability mode

Good news first, NIFTY is above 2014 close of 8282 and Bank NIFTY above 2014 close of 18736. However, it is relief (and not cheer) with recovery from intra-2015 June low of 7940 (17174) post the big sell-off from intra-2015 March high of 9119 (January high of 20907 and March high of 20541). The roller-coaster ride was restricted at set hot-to-hold zone 9000-9150 (20650-21000) and value-buy zone of 7950-8100 (17000-17350), and now around mid-point of the set strategic trade zone for 2015. What next? It is relief that risk build-up of NIFTY stretch weakness below 7950 (into 7500-7650) and Bank NIFTY below 17150 (into 16000-16350) is cut for pull-back over mid-point 8550 (and 19000).

Global cues stay uncertain providing mixed signals

India derived benefit from the economic slow-down in the Euro zone and China to emerge as the most favoured investment destination for FIIs in the BRICS and emerging markets category. The near-zero interest rate regime in the US also helped to a great extent diverting money to high yielding debt and value-buy equity assets against minimum exchange rate risk. While downside risk from the Euro zone and China is minimal, FED start of rate-hike cycle in Q4/2015 is significant risk in play, putting pressure on domestic interest and exchange rate for transition into the equity market.

Domestic cues continue to stay in growth-inflation conflict mode

While worry from twin-deficits is behind, risk on growth and inflation stay valid. The benefit from stable outlook in Brent Crude at $45-70 post Iran resolution and weak Gold for move below 1130-1145 support zone are positive on the CAD, but the beneficial import from export growth is not yet sighted. All taken, CAD is seen in comfort zone at 1-2% with more than adequate net flows through Capital account, thus giving better comfort on Rupee exchange rate stability. RBI in $ buy-mode is good for infusion of domestic liquidity for downside pressure on interest rate. The risk from fiscal deficit is behind with combination of higher revenue receipts and cutting slippages. It is high probability that FY16 fiscal deficit will be better than target of 3.9%. Inflation is worry point as CPI trends into wrong side of 4-6% tolerance zone. On the other side, GDP growth target of over 8% is seen tall, with most estimates around 7.5%. Both combined, Indian economy continue to struggle with low growth - high inflation mode. Despite this conflict, RBI delivered 3-step 75bp rate cut in H1/2015. The 4th step in H2/2015 is tough to come by when RBI CPI outlook is high at 6%. The NaMo euphoria is also diluted against absence of political unanimity on policy initiatives. All combined, investor appetite (both domestic and foreign) is low despite liquidity over-hang. So, there are no clear signals for set up of bullish momentum over the March 2015 high seen in NIFTY and Bank NIFTY.

Neutral consolidation is the way forward

Given the mixed impact from domestic and global cues, consolidation is the best way forward. The uncertainty is from options between bullish consolidation in NIFTY at 8550-9000/9150 (Bank NIFTY at 19000-20650/21000) and bearish consolidation at 7950/8100-8550 (17000/17350-19000). The other options between downside risks below 7950 (17000) and upside reward above 9150 (20650/21000) is kept outside the radar at this stage in the absence of strong cues either way. All taken, retain the set 2015 strategy and maintain NIFTY at 9000-9150 (Bank NIFTY at 20650-21000) as hot-to-hold zone and 7950-8100 (17000-17350) as value-buy zone.

Immediate term outlook lacks clarity

NIFTY seen to be firm above mid-point of set 2015 strategic range (at 8550), so is Bank NIFTY at 19000. The directional bias is dependent on hold here for bullish consolidation at 8550-8850/9000 or sustainable break of 8550 setting up bearish consolidation at 8100/8250-8550. For the short term, good to keep 7950 and 9150 out of focus. Bank NIFTY hold above 19000 is good for bullish consolidation at 19000-19850/20200 while sustainable break of 19000 sets up bearish consolidation at 17800/18150-19000. So, need to fix attention on NIFTY at 8550 (Bank NIFTY at 19000), and now that it is at lower end of 8550-8850/9000 (19000-19850/20200), bulls will be in buy-dips mode into 8550/19000 while bears await break here. The immediate resistance at 8640-8665 (19250-19350) is under pressure for bullish extension towards 8850/19800, which may hold for 8250-8850 (18800-19800) short term consolidation.

Moses Harding