Tuesday, May 19, 2009


Sensex: We said, "With corrective phase holding strongly above the gap-up of 4th May, groundwork for a sharp rally above 121272 appears in place." In its sharpest rally ever, Sensex hit two consecutive circuits, halting the trading for the day at a level which was a huge 17% higher. All stocks and sectors gained, none declined.

The less-than-a-minute action formed a strong bull candle standing with a huge 10% gap-up area
below its tail. Sensex now moves closer to 50% correction level to previous 14-month fall from 21206
to 7697, which is at about 14500. With previous high (before 'Oct fall) at 15580, it should find resistance nearby.

To see full report: CALLS 190509


Key points

Market Outlook — Open with a gap-up and trade positive
Positive —Rupee appreciating smartly
Negative — Triggering of margin calls likely today

Market outlook

The Indian stock market is likely to open with a gap up following the historic session that we witnessed yesterday. Indian bourses were locked in upper circuit and trading was halted yesterday for the first time in the history of the Indian stock markets. The markets gave big thumbs up to stable government formation, which is likely to expedite reforms and attract higher foreign inflows. We feel the markets can again get locked in a circuit if the Nifty surges another 300 points, which is likely today on the back of short covering due to margin pressure

The Sensex has supports at 14000 and 13700 and resistances at 14670 and 15110. The Nifty has supports at 4200 and 4050 and resistances at 4570 and 4660

Asian stocks were trading higher in the morning session. Asian markets, taking cues from US markets, posted gains in the range of 2- 3%

US stocks rallied on Monday as better-than-expected results from the No. 2 US home improvement retailer, Lowe's Inc, helped spark broadbased buying on hopes the recession is easing and consumer spending is stabilising. Investors’ optimism extended to sectors closely aligned with economic growth, including homebuilders, banks, energy companies and retailers

Stocks in news: M&M, Dr Reddy’s, Wipro

To see full report: OPENING BELL 190509



Indian equities have stopped trading for the rest of the day and created a new historic Monday as the benchmarks have hit two consecutive upper circuits. The Sensex has frozen by hitting 17% upper limit for the first time and recorded its best start ever on hopes of a stable government at the Centre following the UPA’s win. The benchmark Sensex ended the day up a whopping 2,099 points (17.2%) whereas the Nifty closed the day with gains of 636 points (up 17.3%). The BSE Mid Cap and Small Cap indices surged 12% and 9% respectively. While all the sector stocks had a field day, gains in banking and realty sectors really stood out. The Nifty has cleared the triple top around 3720, which means the market is in third leg up. The monthly momentum cycle has turned positive, which indicates that from here even if we witness a correction, the probability of that getting deeper is very less. Also on the weekly charts the Nifty has violated the weekly averages, ie 20-WSMA and 40-WEMA. Bulls with 578 advances and six declines dominated market breadth.

Our both short- and mid-term biases are up for the target of 4550 with reversal placed at 3950 for the short term and 3700 for the medium term.


  • RIL
To see full report: EAGLE EYE


Less trade for a long period of time, hence greater influence of domestic demand

Apart from cyclical effects, we believe that the weight of international trade will be smaller in the future, because credit-related goods account for a very large proportion of trade, and deleveraging is likely to last for a long period of time.

If the weight of trade is smaller, countries (e.g. Japan and Germany) that had built their strategies around exports to the detriment of domestic demand will be penalised in a lasting manner. But it is very hard to change strategy, even though China is apparently succeeding in doing so.

To see full report: FLASH ECONOMICS


Bright Green Shoot

Election results spring a big positive surprise: The Indian electorate delivered its most polarized verdict since 1991 and brought the Congress-led UPA back to power with close to majority seat count. The Congress party has won over 200 seats which was our bull case for the election result. This is the highest seat count for any party since the Congress won 244 seats in 1991.

Change in market strategy from “sell the rallies” to “buy the dips”: We think investors can look forward to five-years of political
stability. More importantly, the new government will have more latitude with policy reforms as it will not be as encumbered by coalition politics as it was in the preceding five-years.

Raising earnings estimates and Sensex target: We think that these election results creates room for better earnings growth (through policy action). Thus, we are raising our earnings estimates. In our base case, we think earnings growth for the BSE Sensex constituents on an aggregate basis will likely be +2.5% and +12.5% for F2010 and F2011 respectively (up from our previous forecast of -10% and 11%). Consequently, the fair value estimate for the BSE Sensex rises to 13201. We, now believe, that there is greater probability of our bull case (40% versus 10% previously) rather than our bear case (10% versus 40% previously). Thus, our 2009 target for the BSE Sensex is now 15,300, a 26% upside from current levels. Our view before the elections was that a polarized mandate will likely to drive Indian equities to outperform emerging markets over the ensuing 12 months by a margin of 25%. We think we are now set up for such performance as the consensus revises growth forecasts higher.

What are the risks/headwinds? This is the best possible mandate the electorate could have delivered. The onus is now on the government to deliver on policy reform. The market multiple will almost immediately rise to reflect more optimistic expectations. The biggest risk factor is therefore that the government does not deliver or that it prefers to exercise restraint on stimulus due to the
fiscal situation. Global factors remain outside India's control and will continue to influence the absolute returns in India. India’s return correlation with SPX returns remains high though it may decline in the coming months if India delivers on policy reforms. The third risk factor is the pace of extent of corporate sector operational deleveraging. This will still play a role in determining the
strength of earnings recovery in the second half of F2010. Recent quarterly earnings indicates margin pressures are intact. The fourth headwind to sustained market performance is that valuations on a relative basis are not exactly attractive.

Model Portfolio changes: We are turning more aggressive with our model portfolio. We are reducing defensives in our portfolio and adding more cyclicals. We are going underweight healthcare and closing underweight positions in financials and industrials. We are going overweight consumer discretionary. Consequent to these changes, the cash balance in our model portfolio reduces to zero (we had halved the cash balance in October 2008 to 400 bps). We are adding Maruti Udyog (Rs848) and Larsen & Toubro (Rs988) to our focus list and removing Marico (Rs63) and Cipla (Rs231)

To see full report: INDIA STRATEGY


Upgrading View to In-line

Closing our Cautious View: The Indian Bank Index has lagged the market by 10% YTD. However, strong election results for UPA, in our opinion, reduces the tail risk of sharply higher NPLs. Our economist has upgraded his GDP forecast for India. In an improving economy, banks are less likely to underperform. Hence, we have raised our industry view to In-Line. Our top
picks are IDFC, HDFC, BOI, Union, PNB and BoB

Weak revenue progression: We have been cautious on Indian banks, forecasting weak revenue progression and higher NPLs. F4Q09 normalized earnings faced significant pressures. Banks reported earnings growth by pushing NPLs into the future (restructuring) and booking capital gains. We expected underlying earnings to remain weak into F2010.

Not going all the way to an Attractive view. Our enthusiasm for private banks remains muted. While tail risks have lessened, we still expect their revenue progression to be modest (weaker NIMs and fees). Private bank stocks are factoring in a hectic economic recovery, which we consider unlikely. Hence, we would not chase them. ICICI Bank stock may do well near term,
but, even in the best case, we doubt that ROE can exceed 8-9% in F2010, implying full current multiples.

Our preferred stocks are wholesale-funded IDFC and HDFC: We expect their NIMs to spike due to lower funding costs. Moreover, loan growth maybe higher than our fairly modest outlook. And, since these banks are not bogged down by legacy NPLs, they stand to benefit the most.

We would also go long SOE banks. The government may reform public finances, which would be good for bond markets. Moreover, any move by government to reduce fragmentation or improve efficiencies would be a positive. We like BOI, Union, PNB and BoB.



Elections – Game Changer?

A real mandate- with many positives — The incumbent Congress-led UPA alliance has achieved a near majority; an almost best-case scenario, and should translate into: a) Stable Government for next five years; b) More reform-oriented agenda, with greater policy making flexibility; and c) More economic/results-oriented governance (rather than the political survival/compromise nature of recent governance). In sum, the strongest Government platform in India over the last two decades, and the opportunities could be substantial.

Macro-implications; all positive, but still early to quantify or revise — A strong Government mandate should result in: a) Upward bias in growth expectations (maintain 5.5% FY10 expectations for now) - investment rather than consumption driven; b) Stronger currency - return of enhanced capital flows; c) Stable rate scenario, with a 50bps downward bias. While market expectations of a macro pick up should rise – specific policy formulations, response of the domestic economy, and the global economy environment would determine the extent of change.

Big themes – In play, but not all one way — a) Investment momentum – Likely to revive, on likely policy impetus, capital flows and corporate confidence; b) Fiscal deficit – Will remain a stress point, with initial Government spending, and a still slow economy; c) Reform/policy agenda – infrastructure, insurance, limited divestments, taxation , and social sector (employment and food guarantees); d) Earnings growth – Still too early for a micro impact. Medium/long-term implications more than immediate ones.

Market - Big Bang, Game Changer? — This should be a ‘big bang’ for the market – we expect it to comfortably hold gains at the 13000-13500 index levels for now. The big question - is it a ‘game changer’? Can India get back to the high growth - high valuation of recent years? This event probably does open up meaningful possibilities, but there’s a lot to do, and there could be a lot in the way. We see capital/liquidity-driven and beta-plays as the bigger immediate beneficiaries – infrastructure, banks, real estate and stressed balance-sheets.

Coalition still to be sewn up, ministerial allocations, and budget by July – There still are uncertainties — It's not sealed – the Congress still needs alliance partners for a simple majority and cushion (should not need to make major comprises), the allocation of key economic portfolio’s can influence expectations, and a budget needs to be presented before July-end. Should be smooth, but we cannot rule out hiccups or disappointments.

To see full report: INDIA EQUITY STRATEGY


Election 2009 - All's well, that ends well

Decisive mandate to UPA. Results to the National elections, declared yesterday, represent the best possible outcome for the equity markets. The ruling UPA coalition has got a decisive mandate and the Indian National Congress is placed in a dominant position within the coalition. This consolidation of power, in favor of a mainstream political party, should pave the way for decisive policy reforms across different segments of the economy, unhindered by coalition considerations.

Economy will be the key priority. The new Government has its task cut out. Minimizing the impact of the global shock to the economy, kick starting the investment cycle and sustaining social spending will be key focus areas. These initiatives will require balancing short-term fiscal
support with medium-term consolidation. A relatively light state level election calendar over the immediate term should enable to take tough decisions early in the tenure.

Market outlook – euphoria, followed by consolidation. Equity markets are likely to gap up 7-10% on Monday morning and the tailwind from improved sentiment will likely sustain over the immediate term. Subsequently the markets could go into consolidation mode as investors
await the Government’s initiatives. A rush of equity issuances in the short term to benefit from the improved sentiment is to be expected. But we expect the markets to structurally re-rate over the medium term, given the policy freedom available to the Government to pursue reforms.

Portfolio stance – tank up on local growth. With a stable Government in place, we believe business confidence will look up and the prospects of fiscal consolidation will improve. We are going Overweight the investment cycle and adding to our positive stance on Financials. We are
also upgrading Telecom from Underweight to Neutral and are retaining an Overweight stance on Consumer Discretionary. We are funding the above by reducing Consumer Staples and Healthcare from Neutral to Underweight and reducing IT services from Overweight to Neutral.

To see full report: STRATOSCOPE


Thank Goodness!

Political stability strengthens end-09 bottom out…
Markets should welcome the return of political stability Monday. The Congress-led UPA, after all, convincingly returned to office belying all fears of a hung assembly. Political stability strengthens our end-09 bottom out hypothesis, assuming the G-3 stabilize 2H09 as we expect.

We expect a politically more confident Delhi to allow PSU banks to pare deposit rates - as CPI inflation comes off here - to cut lending rates to support growth.

Besides, the Congress could fund an additional 0.5-1% of GDP fiscal stimulus (~1% of GDP so far) in the July budget by divesting PSU stock. This poses some upside risk to our FY10-11 growth estimates: we estimate Re1 of public spend generates Rs1.5 of GDP. Finally, this defuses the possibility of political risks eroding investor confidence.

… eye ministry for policy cues
We would scan the new ministry to be sworn in on Friday for policy cues. The Congress has already announced that it will retain defense, finance, foreign and home affairs. PM Manmohan Singh is apparently ‘persuading’ Rahul, Congress president Sonia Gandhi’s son, to join his cabinet to spearhead rural development.

Stable Delhi likely to soften rate expectations…
A 25bp RBI rate cut (by July) to oblige the new finance minister should support gilts: read Ashish and me here. Second, gilts should also take comfort from the potential of divestment to moderate fiscal pressures. Third, PSU banks will likely follow the SBI into post-poll deposit rate cuts. Finally, this should culminate in a 50-100bp prime lending rate (PLR) cut by 1HFY10. Do read our rates roadmap here.

… and comfort fx flows
Fx inflows should improve with the political risks over the INR dissolving. Besides FII interest, the DLF stake sell should fetch US$750mn. Anyways, capital inflows have been recently healthy here. This, in turn, supports our twin view of BoP risks overdone/constructive medium-term INR outlook. Do read Christy and me here.

RBI, like investors, positioning for end-09 U in inflation
We are not surprised that RBI Gov Subbarao again flagged the need to ‘think’ about “reversing” his easy money policy, with commodity prices bottoming out. Inflation – likely 0.7% this week – should likely U by September to rebound to ~5% by March 10 (Chart 1). On our part, we expect the RBI to pause with a final by-July rate cut. Reversal should begin by April 10, assuming bottom out end-09
(Chart 2). Even if yields harden, the ~600bp spread between bank PLR and 10y offers sufficient cushion for soft lending rates to persist till 2HFY11 (Chart 3).

To see full report: INDIA WEEK AHEAD


General Elections Verdict – A Hope for A New Beginning

Strong political mandate to Congress Party led coalition: The 2009 general elections outcome announced over the weekend was the best outcome in terms of strength of the leading party’s tally since the 1991 elections. Indeed, this is the first time since the 1960s that any Prime Minister would return for second consecutive term in office.

Upside risk to our forecasts has materialized: In recent past research reports, we have been mentioning that upside or downside risk to our growth forecast will depend on the outcome of 2009 general elections. The seats tally of the Congress Party of over 200 was even higher than our optimistic case (upside risk case) of 170-180 seats.

Government policy response likely to be stronger: Some of the key areas where we expect progress are (a) the government’s effort to improve public finances; (b) acceleration in infrastructure spending; (c) augmentation of government resources through privatization; (d) improvement in share of stable capital inflows and (e) implementation of some of the long pending deregulation measures for the pension funds, banking and retail sector.

Upgrading our growth forecasts: We now expect F2010 GDP growth to be at 5.8% compared with our previous 4.4% estimate. Similarly, we are also increasing our forecast for F2011 GDP growth to 6.8% from 6.2%. We are assuming higher private consumption and infrastructure spending and slightly higher trough for the private corporate capex.

Risks to our new base case estimates: We believe that any variation in global growth will influence India’s outlook via its impact on capital inflows in the country, and external demand. Based on G7 bull-bear case estimates, we see bull scenario growth for India at 6.8% in F2010 and 7.8% in F2011 and bear case at 4.7% in F2010 and 6% in F2011.

To see full report: INDIA ECONOMICS