Equity market : A great start, but only to lose steam before mid-way
It was a glorious run in 2014 with Nifty up by over 30% and Bank Nifty by over 60%, but got fizzled out in Q1/2015 post Nifty stretch by another 10% and Bank Nifty by 11.5%. The 15 month rally in Nifty from end 2014 close of 6300 (Bank Nifty from 11400) lost steam at set hot-to-hold zone of 9000-9150 (NIFTY) and 20650-21000 (Bank Nifty) in the absence of execution triggers on India reform process. The reversal in Nifty (from March high at 9119) was steady and gradual into set cheap-to-acquire zone of 7500-7650 (September low at 7539) with intra-2015 correction by over 17%. Ditto was in Bank Nifty with sharper correction by over 24% into strategic support base at 15650-16000 (September low at 15762). Will Nifty regain steam now for 2015 close above 8282 for positive close in 2015? Bank Nifty 2014 close of 18736 is clearly out of focus for negative close in 2015.
On the short way ahead for rest of 2015, Nifty post 29th September 50 bps rate hike triggered high of 8336 (high on 30/10) is clearly out of sight. The hope at best is to conquer November high of 8116 for stability at 7750-8100 for move into 2016 with confidence for an improved performance. The cues ahead are not very encouraging. The external tailwind support is on the unwind and FPIs have no great appetite for risk-on India assets when other markets have turned relatively better than India. The domestic cues are nervous losing the built up optimism and euphoria, but retaining the hope for resolutions from reform-hungry Government. The domestic cues need to be strong to counter the FED monetary policy driven headwinds. The hope cues are from GST roll-out, resolutions around Banks NPA, making FDI entry smooth, increasing domestic investment & consumption through growth supportive monetary policy and geographical spread of economic activity for higher employment generation and wealth creation. It looks great on paper, but as always execution delay is the major irritant and bottleneck on the way ahead. For now given the lack of clarity either way, it is tough to set up direction bias for December when the participation is low making markets volatile in the absence of two-way liquidity. It is good to retain NIFTY focus at 7500/7650-8000/8150 with most trades expected to be around intermediate risk-neutral zone of 7750-7900.
Bank Nifty is supported only from growth optimism and resultant pick up in credit growth. Barring this, there are many hurdles on the way. Foremost is the NPA woes around most Banks; while some have the P&L and Capital bandwidth for resolutions, most suffer from the absence of these two critical muscles to get out of the NPA woes. It is less said the better on the revenue squeeze on Banks, except few new generation private sector banks. Banks have incurred significant opportunity loss from inefficient price transmission on long tenor Gilt yields from the 1.25% rate cut in 2015. All combined, it will be great if Bank Nifty can close above October 2015 high of 18029, which is 3.75% below 2014 close of 18736. For now, immediate resistance at 17450-17500 looks fragile for extension not beyond 17850-18000 with minor support base at 16550-16700. Beyond here, do not rule out downside risks into set strategic base at 15650-16000, which should hold. It is good to focus rest of 2015 at 15850/16000-17850/18000 with most trades at intermediate risk-neutral zone of 16600-17250.
Money Market : win-win for short term borrowers and long term investors with short term pain for Banks on the investment portfolio
The play in 2015 is on the tenor spread between the operating Repo rate and 10Y bond yield. While the Repo rate is down from 8% to 6.75%, 10Y bond yield slipped from over 8% to 7.45% before up to 7.78%, thus pushing the tenor spread from near zero to over 1%. In this process, significant drop in short term money market rates (upto 1 year) is cheer to borrowers without causing significant hurt to long term retail investors. Despite 1.25% rate cut in 2015, RBI should not be in discomfort with current price transmission which is in satisfaction to "vocal borrowers" and "silent savers". What Next? The sentiment is not in favour of long term bonds when RBI is in extended rate pause mode while FED prepares for start of rate hike cycle. Till CPI inflation trend shifts to lower end of 4-6% long term tolerance zone, India-US 10Y yield-spread at/sub 5.35% will only build downside risk both on India Bonds and Rupee exchange rate. It is good to allow short term stability at 5.35-5.60%. Given the US 10Y short term yield stability at 2.15-2.50%, India 10Y bond yield is set to be in sideways mode at 7.75-7.85%. The strategy therefore is straight forward - to stay overweight and build duration at 7.85-7.93% and avoid chasing recovery into 7.65-7.72% seen as duration-cut zone, retaining tolerance zone of 90-110 bps between 10Y bond yield and operating Repo rate. The comfort is that 2014 close of 10Y bond around 8% is safe with expected close at higher end of 7.70-7.85/7.93%. While 15-20 bps year-on-year appreciation is ok for domestic investors, foreign investors take pain against 6-7% Rupee depreciation.
Currency Market : It is distant away for Rupee stability and for shift into consolidation mode
Rupee is already distant away from 2014 close of 63.03 and seen weak to punch a new 2015 low beyond recent 66.90, down by over 6%. However, there are many comfort cues. Rupee depreciation is lower than 1 year time value interest differential of average 7%. Rupee depreciation is lower than USD appreciation against major currencies; DXY already up by over 16% at over 100 against 2014 close of 90.27. Rupee is up against Euro by over 7% against 2014 close of 76.24. All combined, Rupee exchange rate volatility has not caused pain and agony to most stakeholders on end-to-end basis. What Next? Rupee has lost the aggressive FPI support for now. This has pulled in importers fear and exporters greed driving the forward market in $ demand driven mode. Despite RBI having comfortable reserve position, the need for fair-value adjustment of Rupee along with peers will only lead RBI to speed-break the adjustment rather than play against the trend. All taken, Rupee is at risk of shift of play to 66.20/66.50-68.50/68.80 in traction with DXY bullish momentum at 99.35/99.85-101.85/102.35. It will be pain for "carry trade" FC borrowers on 12M $ shift to 70.50-72.50 trading range, up from previous 69-71. It is important for RBI to protect July-August 2013 low of 68.60-68.85 to avoid set up of panic, which then would need yet another set of administrative strictures and NRI scheme. The positive take-away is the set up of appetite for "Masala Bonds" from foreign investors and lenders.
EUR/INR is solid at 69.90/70.15-70.90/71.15 while EUR/USD stay in sideways mode at 1.0450/1.05-1.0650/1.07 and USD/INR at 66.65-67.15. It will be very slippery turf below 70 against breakout bias into 72.50 on sharp relief correction on the EUR/USD and marginal relief for Rupee.
Moses Harding
Note : I am shifting base from Kolkata to Mumbai, hence may not be available for rest of December. Will try my best to show my presence here off and on. Best wishes, Good luck and take care!
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