Rational exuberance to drive Nifty higher for target of 11700

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1 Rational exuberance to drive Nifty higher for target of 117 Research Analyst Amit Gupta Azeem Ahmad Raj Deepak Singh Nandish Patel December 13, 217 ICICI Securities Ltd. Retail Equity Research 1

2 Since first rate hike by Fed in Dec 215, US equites continue to clock strong returns, drawing incremental share of flow Equity continues to outperform since start of rate hike cycle in US Since the commencement of rate hike by the US Fed in 215, equity markets have constantly outperformed other key asset classes like gold and bonds. This has triggered strong inflows into equites at the expense of other key asset classes like bond and gold PMI Manufacturing/Composite Returns (in BPs in Bonds & % for others) Dec-16 Sentiment continues to improve at corporate, individual level in US Dec PMI Manufacturing PMI Services Consumer Confidence 12 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Expansion Contraction Jun-17 Aug-17 Oct US 2 year US 1 Year Gold S&P Index Fed Rate Consumer Confidence Mar-17 Jun-17 Dec-17 Rate hike months Forecast Mar-18 Easy financial conditions coupled with subdued volatility and robust sentiment from corporates, individuals to continue to thrust US equities higher Jun-18 PMI Manufacturing/Composite Oct-18 Dec-15 Feb Apr-16 Fed Fund rate PMI Manufacturing Jun-16 Aug-16 Oct-16 S&P is likely to clock strong positive returns in 218, as the Fed is expected to deliver two or three rate hikes in 218, which is likely to keep the underperformance trend of bonds, gold intact (caveat being deflation shock) Easy financial conditions, subdued volatility to aid further upsides Tight financial con Dec-16 Feb-17 Apr-17 PMI Services Easy Financial Con Jun-17 Aug-17 Oct Consumer Confidence December 13, 217 ICICI Securities Ltd. Retail Equity Research 2

3 Indian markets following S&P: What happened in S&P in 216 started in Nifty from 217 The decline in standard deviation (SD) of S&P returns was seen in 216 when SD declined from 4% to 3%. In the Nifty, it was seen in 217 when SD of Nifty returns fell from 5% to 3%. We believe 218 would be the year in which SD of Nifty returns could witness a further decline from 3% to 1.5% following S&P pattern. Hence, we believe the Nifty should be able to post near 17% return in the coming year Trend of declines getting smaller seen in S&P since 216 Returns Returns Limited decline trend also seen in Nifty since Net Returns Max consecutive monthly drawdowns Net Returns Max Consecutive monthly drawdowns Standard deviation of S&P returns started declining in 216 Year Standard Deviation Return 215 4% % 216 3% 1% % 17% Standard deviation of Nifty returns starts declining in 217 Year Standard Deviation Return 215 4% -3% 216 5% 4% 217 3% 24% % 17% Hence, Nifty projection for 218: 117 December 13, 217 ICICI Securities Ltd. Retail Equity Research 3

4 Nifty monthly returns have been forming uniform distribution pattern an indication of steady flows Frequency of Nifty monthly returns have been mainly within -1-4% Nifty Monthly Returns 15% 1% 5% % -5% -1% No of Months Steady inflows have led to Nifty following Uniform distribution pattern -8% -7% -5% -4% -2% -1% % 1% 2% 3% 4% 5% 6% 7% 8% Nifty monthly performance Bounce seen after two consecutive negative monthly closing Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Nifty returns uniformly distributed The Nifty returns have been within -1-4% range. The extreme cases of large losses or gains have remained limited. This shows the steadiness of returns where the Nifty returns pattern has formed uniformly distributed pattern No more than 2 negative monthly closings The Nifty has been unable to close negative on a monthly basis for three consecutive months despite any negative event due to this persistent inflow December 13, 217 ICICI Securities Ltd. Retail Equity Research 4

5 Writing positions formed in 1 Put of December 217 and 97 Put of June 218 in middle of 217 Price Open Interest 1 Put of December 217 Nifty writing seen at 1 Put EM Currency basket strength justified 1 Put is shorted at 4 points of premium indicating strong support at 96 Even when the market was jittery and saw a correction from 12 to 97 in the middle of 217, action was taking place in 1 Put of December and 97 Put of June 218. These strikes were getting written, which signals towards strong support near these levels Nifty 1 Put writing suggests the Nifty may try to form a base near 1 and have an upward trajectory December 13, 217 ICICI Securities Ltd. Retail Equity Research 5

6 June 218, 97 Put writing further strengthens view of strong support near these levels 97 Put of June Put of June 218 is also shorted, which signifies support near these levels in the coming year Price Open Interest 97 Put of June 218 also seeing EM Currency basket strength justified writing The action happened not only in 217 Put strike but also in June 218 Put strike where premiums were shorted in anticipation of limited downsides in the market The 97 Put of June 218 is still witnessing writing. This also started when the Nifty was near 97. This strengthens the view that strong support for the market is close to these levels December 13, 217 ICICI Securities Ltd. Retail Equity Research 6

7 Liquidity likely to remain benign in 218: Despite US Fed unwind, ECB, BoJ continues with QE Despite US Fed unwind, ECB, BoJ continue on QE path in H1 of 218 ECB & BoJ to continue on QE path % Return In US $ Billion Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Consistent liquidity flows lead to gradual equity rise across markets Jun-18 Jul-18 Aug-18 Sep India S&P DAX Korea Taiwan BoJ Oct-18 Nov-18 All the markets have got synchronised on account of persistent flows, which are expected to continue in 218 ECB Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 While the US Fed has started its unwinding of balance sheet, ECB and BoJ are likely to continue with their QE programme Together, they will continue to push US$1 billion of QE till June 218. Even after this, BoJ is likely to continue with its US$6 billion QE run rate. Hence, the central bank liquidity picture is likely to remain positive in 218 A positive liquidity environment bodes well for risk assets like equities Gradual upsides seen in equity markets The chart on the left side depicts total upsides-total downsides in various equity markets. It shows how this difference is increasing eventually in favour of rising markets December 13, 217 ICICI Securities Ltd. Retail Equity Research 7

8 Developed markets continue to see flows in equities US equity ETF has seen inflows at strongest pace. In US $ Billion EM & G7 Volatility Dec-97 ETF flows in the US are continuously rising and are seen at a 2-year high in the latter part of Oct-98 Nov-12 Aug-99 Feb-13 Jun- May-13 Apr-1 Aug-13 Feb-2 Nov-13 Dec-2 Feb-14 Oct-3 May-14 Aug-4 Aug-14 Jun-5 Globally volatility on declining trend not only in developed market but also in EMs Nov-14 Apr-6 Feb-15 Feb-7 EM Vol G-7 Vol India Vol May-15 Dec-7 Aug-15 Oct-8 Nov-15 Aug-9 Feb-16 Jun-1 May-16 Apr-11 Aug-16 December 13, 217 ICICI Securities Ltd. Retail Equity Research 8 Feb-12 Nov-16 Dec-12 Feb-17 Oct-13 May-17 Aug-14 Aug-17 Jun-15 Apr Feb-17 India VIX Equity ETF in US clocked record inflow ETFs in US have outgrown actively managed MFs. On a consolidated basis, strong inflow is seen in equity ETF As per the latest data for 217, equity based ETFs have received almost double the record inflows seen in 216 This suggests preference for equity remains Volatility to remain lower in equities Cross asset volatility is likely to remain low. In equity markets more specifically, volatility has been moving in sync not only for India and EMs but also the developed markets With chances of any major risk shock remaining benign, volatility across equity markets is likely to remain low

9 Emerging markets: Equities continue to attract fund flows with outflows seen from bonds in H2 217 Largest EM ETF has seen strong inflows EM equites continue to be strong In US $ million In US $ million , 1,5 1, , -1,5 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Contrastingly, bond market ETF has seen outflows since September, 217 Dec-7 Apr-8 Aug-8 Dec-8 Apr-9 Aug-9 Dec-9 Apr-1 Aug-1 Dec-1 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 EMs backed by strong macro environment of strong growth and lower inflation have kept FIIs glued to buying into the EM equity class Asian EMs have particularly performed well, with returns exceeding 2% for most With GDP, EPS growth continuing in most EMs, FII interest in EM is likely to continue in 218. This provides imputes for EMs to move higher Bond market flows taking a breather At the start of the year, as the reflation trade eased, EM bonds saw strong buying interest in H1 of 217. However, in H2 of 217, as growth picked up pace in most Ems, the inflows in bonds tapered off Additionally, the decidedly hawkish centrals banks of the US & Europe kept yields higher. This reduced the spread between developed markets and EMs. As a result, the alpha from EM bond portfolio has reduced FIIs are using the equity route for EMs as GDP growth and EPS expansion remains intact for most EMs Hence, in 218, EM equites should continue to see strong inflows even if bond market inflows remain subdued December 13, 217 ICICI Securities Ltd. Retail Equity Research 9

10 Strong liquidity induced strength in most currency pairs Currency Returns (%) All major currency pairs have strengthened in 217, as Dollar Index weakened over 1% 2% 15% 1% 5% % -5% -1% -15% Czech Republic Poland Europe Bulgaria Denmark Hungary South Korea Thailand Malaysia Romania Israel Mexico Taiwan Sweden Singapore India China Canada Peru Switzerland Norway Japan Russia Chile Newzeland South Africa Colambia Indonesia Hong Kong Philippines Brazil Australia Argentina UK Turkey Size of corrections in equity markets reducing due to resilient currency in last couple of years Size of Correction (%) Major currencies have appreciated EM Currency basket strength justified At the start of the year, on fears of reflation trade EM currencies were looking weak. However during the year, as the EM s continued to post robust growth, their currency and forex reserves positions improved. The usual suspect Current account deficit, also improved for most key EM s. Hence as we look into 218, the EM currency basket seems substantially resilient (when compared in the last couple of years). With the commodity recovery story intact in midst of strong macro environment, EM s are set to deliver strong & synchronised price performance in 218 Equity corrections have reduced Since the last few years the steady flows in the equity markets have restricted the equity downsides. Certain major downsides have become on account of events like US rate hike, Election jitters in Euro S&P DAX Nifty Hangseng Taiwan December 13, 217 ICICI Securities Ltd. Retail Equity Research 1

11 Rupee remained one of the strongest in EMs: Recent sovereign upgrade may take it towards 62 Moody s upgraded India last time in Over the next few years, the rupee strengthened over ~15% and tested its mean-3*sigma levels near 39.5/US$ Rating agency Moody s upgrades India s sovereign bond rating after 13 years on the back of improved fundamentals and structural reforms. This could be a booster for the rupee to strengthen against US$ and it could test its mean 3-sigma level near 62. INR December 13, 217 ICICI Securities Ltd. Retail Equity Research 11

12 Stocks witnessing accumulation pattern- Quant Picks for 218 Stock selection based on recent fund flow action Stocks Initiation range CMP Target Stoploss Engineers India Havells Arvind Adani Ports GSFC December 13, 217 ICICI Securities Ltd. Retail Equity Research 12

13 Engineers India: Finally moved above buyback price Engineers India lower wild swings indicate accumulation pattern Engineers India - Volatility No of Observations Buy Range : Target: 245 Stop loss: 161 Number of positive closings: Displaying consistently strong performance post 216 Total Count Return Intervals Positive Close Negative Close Net Positive year average 51% 1-year average 37% 6M average 34% Current 31% Engineers India s historical volatility has been on a declining pattern, a sign of accumulation in the stock. In a one-year period, it had declined from 51% to 31%. The stock has started moving above the long time consolidation range * Historical volatility is the standard deviation of stock futures prices of previous months Company buyback seen near 157 Engineers India shares were bought by the government at an average price of 157, which would remain important in the coming months The government had 57.2% in EIL prior the launch of the crore share buyback on July 25. The 4.19 crore share buyback plan at 157 per share ended on August 7. Post buyback government holding is at 54.17% After spending some time near the buyback price, the stock Has taken out the last seven-year s supply zone of December 13, 217 ICICI Securities Ltd. Retail Equity Research Net Positive

14 Havells: Volatility declines despite numerous jitters in 217 Havells Returns are concentrated within (-2% to 4%) band and large declines are arrested Historical volatility No of Observations Buy Range: Target: 655 Stop loss: 47 Return Intervals Number of positive closings: Reverts from negative to positive Total Count Positive Close Negative Close Net Positive Net Positive 2-year average 4.5% 1-year average 38.% 6M average 32.6% Current 31% Despite witnessing numerous profit booking declines, Havel's volatility has gradually been coming down. It is a sign of buying seen at lower levels Havells Coming out of last year s consolidation The recent reduction of GST on cables from 28% to 18% has done a word of good for the stock. It has been coming out of last year s consolidation It is focussing on street lighting where margins are expected to remain high. In addition, the entry into AC segment would also benefit the company The recent price move has seen 37% closure of short positions. These were positional shorts, which were added in the stock in the last nine-month consolidation December 13, 217 ICICI Securities Ltd. Retail Equity Research 14

15 Arvind: Coming out of last three-year s consolidation Arvind Despite underperformance in last year, the highest no. of returns seen within (-2% to 3%) Historical Volatility No of Observations Buy Range : Target: 545 Stop loss: 375 Return Intervals Number of positive closings post 216 increase Total Count Positive Close Negative Close Net Positive Net Positive 2-year average 5.% 1-year average 46.5% 6M average 44.% Current 39.5% The volatility pattern of Arvind shows the accumulation seen in the last couple of years. The volatility in 216 was near 5% when the stock was trading near 36 levels. This volatility has been continuously declining and has come down below 4%, which may act as a trigger for further upsides in the stock Arvind coming out of last three year s supply zone Arvind has started seeing positive consolidation. Declines in the stock have got limited The delivery buying activity has increased of late, which has led to a gradual rise in the stock The company has announced the demerger of its branded apparel and engineering business, which would create value for its shareholders December 13, 217 ICICI Securities Ltd. Retail Equity Research 15

16 Adani Port: Sharp reduction in volatility along with positional short positions Adani Ports Accumulation seen with lower negative wild swings amid last 6-month consolidation Adani Historical Ports volatility No of Observations Buy Range : Target: 495 Stop loss: 345 Return Intervals Seeing sharp surge in positive closings in 217 after remaining dull in previous years Total Count Positive Close Negative Close Net Positive Net Positive 2-year average 46.% 1-year average 38.% 6M average 32.5% Current 25.8% One of the sharpest falls was seen in Adani Port volatility, which is an encouraging sign. In the last six to seven months when it has been consolidating above 215 high of 37, volatility has declined from 32.5% to 25.8%, which is a sign of buying Adani Port Forming base above 215 highs Government support for infrastructure spending by private players is likely to be a big push for infrastructure players Government focus on increasing modal share of sea base may lead to higher investment in the port space After seeing quite high closure of short positions, the stock is expected to pick up momentum with addition of long positions that are getting rolled over to forthcoming month. Leverage is still quite low in the stock, which can limit downsides in F&O space December 13, 217 ICICI Securities Ltd. Retail Equity Research 16

17 GSFC: Downsides have got limited due to ongoing accumulation Total Count Net Positive GSFC Saw numerous declines from 15 but negative returns frequency has been lower Historical volatility No of Observations Buy Range : Target: 174 Stop loss: 119 Number of positive closings: While negative, have seen strong improvement in H2 of Return Intervals Positive Close Negative Close Net Positive year average 42.% 1-year average 47.% 6M average 44.5% Current 37.5% Volatility of GSFC has started declining since last year. Despite moving higher from 42% to 47% in 216, it has declined from 47% to 37.5% in the last year. This has happened despite recent profit booking from 16 to 135 levels GSFC Declines getting arrested near GSFC started 217 at 12 and has moved up to 14 levels amid quite a number of declines seen from We believe the accumulation pattern is building up in the stock, which has limited the declines and also the much needed volatility. Direct benefit transfer (DBT) could be a good trigger for this space. In addition, the pick-up in rural income could also lead to a better performance There has been gradual accumulation in the stock in the cash and futures space. Since the inception in F&O segment, open interest in the stock has risen from 8 million shares to 21 million shares December 13, 217 ICICI Securities Ltd. Retail Equity Research

18 Stock Performance in 12 months Engineers India Havells Dec-16 Arvind Dec-16 3-Jan-17 3-Jan Jan Jan Feb Feb-17 7-Mar-17 7-Mar Mar Mar Apr Apr-17 9-May-17 9-May-17 3-May-17 3-May-17 2-Jun-17 2-Jun Jul Jul-17 1-Aug-17 1-Aug Aug Aug Sep Sep-17 3-Oct-17 3-Oct Oct Oct Nov Nov-17 5-Dec-17 5-Dec Dec-16 3-Jan Jan-17 Adani Ports Dec Jan Feb Feb-17 7-Mar Mar Apr Mar Apr-17 9-May-17 3-May-17 2-Jun May Jun Jul-17 1-Aug Aug Jul Aug Sep-17 3-Oct Oct Sep Oct Nov Nov-17 5-Dec-17 18

19 Stock Performance in 12 months GSFC Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov-17 19

20 Pankaj Pandey Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 1 st Floor, Akruti Trade Centre, Road no.7, MIDC Andheri (East) Mumbai 4 93 research@icicidirect.com 2

21 ANALYST CERTIFICATION We /I, Amit Gupta B.E, MBA (Finance), Azeem Ahmad MBA (Fin), CS, Raj Deepak Singh BE, MBA (Finance), Nandish Patel, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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