Nifty chart: a midweek technical update (Mar 08 ‘17)

FIIs were net buyers of equity worth Rs 50.6 Billion during the three days of trading this week. DIIs were net sellers of equity worth Rs 32.9 Billion, as per provisional figures.

Steel exports in Feb '17 (at 0.75 MT) was up by 150% over Feb '16, but declined by 15% over Jan '17. Imports in Feb '17 (0.49 MT) was down by 46% over Feb '16 and by 19% over Jan '17.

The government is talking to almost 300 Indian and foreign companies for proposed investments of US $62 Billion, of which nearly half is expected from Chinese companies.

The daily closing chart pattern of Nifty is clearly hesitating near its previous (Sep 8 '16) top of 8953. Proximity to the psychological level of 9000 and uncertainty about the upcoming state election results on Mar 11 have kept bulls in check.

All three EMAs are rising, and the index is trading well above them in a bull market. However, for the past two weeks, the index has touched higher tops while the three daily technical indicators have touched lower tops.

The combined negative divergences can lead to some correction or consolidation. A sharp correction (4-5%) can occur if the BJP does not fare well at the polls - particularly in UP.

Nifty's TTM P/E continues to hover above 23 - well above its long term average. The breadth indicator NSE TRIN (not shown) has emerged from its overbought zone. Index upside appears limited.

(A friend - to whom I had recommended a textile exporting company back in Nov '16 - called me yesterday to say that the stock has gained 40% and asked whether it would be OK to buy at the current price. Such queries often indicate an intermediate top!)

If you are ready to jump into the market feet first, take another look at the chart. The index has gained 1100 points (~14%) in less than 3 months. This is a time for cautious optimism and partial profit booking, not euphoria.

Causes and consequences of lower commodity prices – a guest post

Globally, prices of various commodities have been on a downward spiral. Prices of oil, gold, steel, copper, aluminium have reduced considerably. That should be good for the Indian economy – as India imports significant quantities of oil and gold.

Reality is a little different. Lower oil prices have shrunk our current account deficit and benefitted oil marketing companies, but not oil explorers like ONGC and Cairn. Lower metal prices have hurt banks that have large exposures to the metals sector, and producers like Tata Steel and Hindalco.

In this month’s guest post, Nishit assesses causes of lower commodity prices and their consequences. Small investors should benefit from this analysis, as it lends perspective to the commodity cycle and would enable them to fine tune their investments.

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Commodity prices are collapsing all over the world. Gold is at a 5 years low, crude oil is very near its lows. Metal prices are tanking. Why is this happening and how can we benefit from this?

First of all, commodity cycles are long drawn out affairs of over 10-12 years between peaks and troughs; which means, prices are not going to rise in a hurry. There may be some corrective spikes but prices would continue to correct over a period of time.

All these years, China was consuming and stockpiling huge hoard of resources building steel and concrete cities which fuelled a real estate boom. China also set up huge capacity of Steel production. All these led the commodity prices many times higher. Now the Chinese economy is floundering; the real estate sector has no buyers and the stock market in China is collapsing.

China has created so much capacity - what does it do with it? Obviously, it cannot be left idle. So, it is now exporting steel priced very close to the cost of production of steel in India. The Government is doing its bit by adding some anti-dumping duties. Overall, the prices remain depressed.

China was accumulating gold reserves and that was the reason price of gold was going up. Now they have started selling some gold leading to lower prices.

Now the bad news. Commodity cycle related companies like steel industry in India will be in doldrums for some time to come. Banks have huge exposure to these companies. These companies make profit equal to just about the interest payment on their loans. Forget about repaying principal amounts.

In India, people rush to buy gold at every price drop. If they buy now they will have to hold it for at least 5-6 years or maybe even longer.

Lower crude oil prices will help the Indian economy. These will also continue for some time to come - at least for this year 2015.

Having an understanding of why commodity prices are correcting will help us capitalise on them.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan. You can reach him at nish.stockid@gmail.com)

Modi effect on stock market – a guest post

After all the debate, discussion and anticipation, the Modi government has been sworn in and the council of ministers announced. The suspense of what will happen and who will get which ministry is over. Now it is time for getting down to business.

The first salvos have been fired by the PM – by first inviting heads of SAARC governments to the swearing-in ceremony and holding one-on-one discussions with them about bilateral issues and then, by setting up a SIT for unearthing black money in the economy. The first was an unexpected courtesy to our neighbours. The second is typical no-nonsense ‘walking the talk’.

What will Modi’s effect be on the stock market? In this month’s guest post, Nishit takes a look at the sectors that are likely to lead the next up moves in the stock indices if Modi continues to deliver on his poll promises.

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My previous month’s guest post began this way: “The market is going up as if there is no ceiling. Every day one sees their portfolios increase in value and everyone seems to be getting swept up by the Modi wave. Now, let us try and see what can derail this rally.”

Now, Modi has won the elections with a huge mandate. What next?

The first 6 months to 1 year are the honeymoon period for any Government. This is the period when they are given a degree of latitude. This is the time when the markets have hope in the new Government.

The new Government has promised jobs, growth and progress. How will they do this?

Firstly, they have to tackle the infrastructure mess by clearing road projects and making coal available to the power plants. Stocks of Infrastructure and power companies would start moving once these road blocks are cleared.

Next, finance has to be provided for these projects. Banking and infrastructure lenders will be the next to move up. As provider of materials for infrastructure to be built, steel and cement companies will be the next ones to rise.

In the midst of all this, IT and Pharma stocks, which are seen as defensives and export oriented, will lag behind. This is because the rupee has strengthened which may lead to their profits being curtailed.

PSU stocks should be another category which needs to be watched closely. Gujarat government stocks have done well under Modi.

Also, company stocks of a few industrialists perceived to be close to Modi, like the Adanis and the Ambanis, need to be closely watched.

These are interesting times we live in. For the first 6 months and especially during the time till the Union Budget in mid-July, the markets may rise on hope. After Diwali, emphasis will shift to the performance and results delivered by the new Government.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Will a poor monsoon affect your portfolio? – a guest post

This year, monsoon rains have been conspicuous by their absence. While a few parts of the country have received excess rainfall, that has been the exception than the rule. Drought-like conditions are prevailing in many parts. In other parts, rainfall has been scanty to mediocre.

By all accounts, rainfall will be below average this year. What will be the effect of a poor monsoon on your investment portfolio? In this month’s guest post, Nishit looks at a few sectors that may get negatively affected by a poor monsoon and a few that may not do too badly.

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The monsoon this year is likely to be deficient. Which sectors and stocks will feel the impact? This is a burning question in the minds of investors. Let us try and analyse the impact of a poor monsoon.

The rainfall deficit has shrunk to about 15% from 22% a couple of weeks earlier. Also, the reservoirs are filling up. They are now 96% filled as compared to the last 10 years’ average and 80% filled as compared to last year at this point of time.

With steady rains falling across the country, there should not be any drinking water problem. Agriculture output will be hit, but there will not be food shortages - thanks to the surplus food grains of the previous years.

Having said all this, what will be the impact? The hardest hit will be the farmer. He will have less produce to sell in the markets and consequently less money to spend. All the rural focused sectors will be hit. The hit will not be immediate but come during the harvest season, a few months down the line.

The farmers will not be celebrating the festive season by buying new motorbikes. Thus, the 2 wheeler segment may face the biggest hit. When the times are down, farmers will also not invest in new tractors and farm equipment. This also means tractor manufacturers will face lean times.

In recent times, FMCG majors like HUL and ITC have risen to new all time highs based on uncertainty in the markets. They may take a major hit if the rural population cuts down on spending. Less colas and chips will be consumed. Sectors like IT (Information Technology) will be neutral to a poor monsoon. The banks may take a hit in the form of NPAs in case loans to farmers turn bad.

Amidst all this gloom, the sugar sector - especially the sugar mills having previous stock - will flourish. The farmers may not get much, but the sugar mills will benefit from higher realisations thanks to surplus inventory.

Overall, Indian GDP may come down by 0.6% or so. Surprisingly, in previous years of scanty rainfall, the stock markets have actually done well. The fiscal deficit may increase if the government comes up with any populist schemes. Higher food grain prices may lead to higher inflation forcing the RBI to go slow on interest rate cuts.

In the current scenario, it pays to focus on sectors like sugar and also sectors which may not get impacted much by a poor monsoon. PSU banks with their good dividend yields offer one area where folks with expectations of moderate returns may park their funds.

Cyclical sectors like steel and infrastructure, which are currently beaten down, can be nibbled at. Also, this may be the last chance to lock in at relatively high rate of interests. Bank FDs (ICICI Bank is still offering 10% to Sr Citizens for a period of 4.9 years and Bank of India 9.7%), NCDs (Shriram Transport offered 11.4%), some stocks would be a good mix to be invested in right now.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan).