Derivatives Thematic Report

Transcription

1 July 15, 215 Derivatives Thematic Report Strong MF flows outperforming FII flows. Historically it bodes well for broader markets Nifty likely to hit 88 post consolidation... Research Analyst Amit Gupta Azeem Ahmad Raj Deepak Singh

2 The money flow picture: MFs back in reckoning Deal Team At Your Service The year 215 started on a strong footing, with most domestic and international participants overweight on India. However, as 215 panned out, rate cuts by the RBI failed to pull up the markets while the earnings downgrade on the back of weak Q4FY15 continued. Global headwinds also grew. Post the Russian turmoil at the start of year, the focus shifted to the Greece debt turmoil and crash in Chinese stock markets From a fund flow perspective in 215, FIIs kick started the year with strong buying in domestic equities. As the Nifty reached 91, they started profit booking while their fresh inflows are still broadly absent from the markets MF Buying Picking up pace Equity FII MF Insurance DII Total Jan Feb Mar Apr May Jun Total (in INR Cr) In US $ Bln Segmental Equity flow break up DIIs, which includes MFs and insurance funds, took this as an opportunity to Invest as they were witnessing strong inflows from investors. MF roles, in particular, need closer analysis as of the total DII inflows in 215 of 27,5 crore, MFs have bought 3, crore while insurance companies have sold 2,5 crore Jan Feb Mar Apr May FII Mutual Funds Insurance Companies Jun 2

3 MFs vs. FII investment in trailing one year: MFs taking command of market Jun'14 Jul'14 Aug'14 Sep'14 Oct'14 Nov'14 Dec'14 Jan'15 Feb'15 Mar'15 Apr'15 May'15 Jun'15 Mutual Funds FII In the last three months, when MFs poured in US$3.5 billion, FIIs withdrew US$2.7 billion (ex- Sun Pharma deal). Going ahead, we believe this trend is likely to continue as the global volatility across asset classes is on the rise. This is likely to create headwinds for secular FII inflows into EMs MFs, on the other hand, are pumping in record flows as they are increasing their allocation towards equities. A strong pipeline of government reform initiatives and a pick-up in credit growth are key triggers in the coming weeks that are likely to drive more aggressive buying from MFs. The midcap segment is buzzing on account of this. The CNX Midcap Index is only 2% away from the record highs while the Nifty is still 8% away from record highs 3

4 Investment in MF at record highs. Last four quarters attract record flows MF AUM swelling to over 12 trillion MF quarterly investments: Pace increases in last four quarter 12 2 MF AUM (in INR million) MF QoQ investment (in Cr) Jun-2 Jun-3 Jun-4 Jun-5 Jun-6 Jun-7 Jun-8 Jun-9 Jun-1 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15-5 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Mutual funds are on a buying spree in 215. In the quarter ended June 3, 215; the MF AUM crossed the 12 trillion mark as they bought over 396 billion during this quarter. This was their seventh consecutive quarter of buying (as reported by Amfi). The buying during this quarter is more significant because despite FII outflows and a weak Q4FY15, mutual funds pumped in record amounts 4

5 Historical evidence suggests strong performance of MFs bodes well for strong Nifty performance. Case 1: Where MFs bought and DIIs sold FII Selling MF buying Nifty upmove T+3 Months Jun Current May Current Dec Gained upto 1% May Gained upto 16% Figures in INR Crores Case 2 : Where MF buying was larger than FII buying Date FII Buying MF Buying Nifty upmove T+3 months Apr Gained upto 5% Oct Gained upto 8% Aug Gained upto 8% Apr Gained upto 6% Jan Gained upto 18% As visible in Case 1 and Case 2, the Nifty registers a strong performance posts strong MF investments. In Case 1 MFs typically buy in a pessimistic set-up, where FIIs are selling. In these instances, MF buying helps to arrest the declining trend in the market. As a result, in the last three months, strong returns were seen in the Nifty. The recorded history suggests this event has happened only in three instances (including one in May, June 215). This buying bodes well for upsides in the Nifty and broader markets In Case 2, MF buying exceeds that of FII. This sentiment is historically seen when there is a strong risk-on sentiment prevailing. Both FIIs and DIIs in such a case bought aggressively. As a result, the last three months registered strong market returns This trend analysis suggests the Nifty is likely to register strong returns in the coming three months. The seeds of the same could probably be sown in the ongoing Q1FY16. Higher government expenditure along with reform initiatives, bottoming of sharp earning downgrades trend on the back of a pick-up in credit offtake along with an improvement in asset quality of banks could be triggers, which may lead to Nifty upsides 5

6 Historical evidence suggests strong performance of MFs bodes well for midcap space Total corpus invested in Large Caps & Mid Cap MF s Share of midcap as percentage of total MF investments Total Corpus Invested 21, 18, 15, 12, 9, 6, 3, Large Caps 85% 83% 8% 78% 75% 73% 7% 68% 65% 31% 29% 27% 25% 23% 21% 19% 17% 15% Mid Cap Dec-5 Aug-6 Apr-7 Dec-7 Aug-8 Apr-9 Dec-9 Aug-1 Apr-11 Large Cap Dec-11 Aug-12 Mid Cap Apr-13 Dec-13 Aug-14 Apr-15 Dec-5 Aug-6 Apr-7 Dec-7 Aug-8 Apr-9 Dec-9 Aug-1 Apr-11 Large Cap Dec-11 Aug-12 Apr-13 Mid Cap Dec-13 Aug-14 Apr-15 Mutual funds have over the years increased their exposure to the equity markets. As visible (left chart) from the start of 214 the rate of growth in MF investments has picked up pace and is growing faster than witnessed in the last decade. This is a positive development, which is likely to support equity markets Typically, mutual funds tend to focus on midcaps as they offer greater potential for returns. In the chart on the right, the phases where midcap allocations have increased, midcap indices during this period witnessed stronger returns than the Nifty. It suggests use of midcap stocks for alpha generation by mutual funds 6

7 Nifty likely to hit 88 in current consolidation with support near 82 Nifty Call closure trend seen along with ATM Put writing Declining India VIX to limit downsides.. 6 Nifty Call Put Concentration (JULY) OI in Lacs Calls Puts Jul 14-Aug 14-Sep 14-Oct 14-Nov 14-Dec 14-Jan 14-Feb 14-Mar 14-Apr 14-May 14-Jun Nifty & midcap up move of larger degree Bank Nifty /Nifty price ratio, near highest level of 215 Nifty Index Start Date Price (Low) End Date Price (High) Change % Change 27-Mar Apr % 7-May May % 12-Jun Jul % CNX Mid Cap Index Start Date Price (Low) End Date Price (High) Change % Change 27-Mar Apr % 7-May May % 12-Jun Jul % Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Price Ratio : Bank Nifty/ Nifty 3 Day Moving Avg 7

8 Midcaps outperforming Nifty Deal Team At Your Service Nifty vs. midcap in 215: Midcaps outperform... Mid Cap/ Nifty Price ratio: MF outperformance in recent phase CNX Mid Cap Nifty Dec-14 Jan-15 Jan-15 Feb-15 Mar-15 Mar-15 Mar-15 Apr-15 Apr-15 May-15 May-15 Jun-15 Jun-15 Jul-15 As visible in the chart on the left, the Midcap index has clearly outperformed the Nifty during the year. The Nifty is up 2% while the midcap index is up over 8% for 215. The midcap buying spree is now focusing on stocks that are linked with the core economy. Hence, stocks from the cement, capital goods and auto sectors are seeing buying, pushing the midcap index to record highs In the chart on the right, the CNX Midcap/Nifty price ratio is given. It is suggesting constant alpha generation via midcaps. Recently the price ratio gradient has steepened suggesting the midcap performance is getting even stronger 8

9 Stock Picks 9

10 Quant Picks: Buy Ambuja Cement in range of , Target price: 291, Stop loss: 219, (Time Deal frame: Team Three At months) Your Service Since the last series, the stock has been moving up on the back of short covering. Near 11% open interest has been closed since it started moving up from 22 levels Good delivery pick-up was seen in the stock near levels in June. Hence, the immediate support for the stock remains at 238 It has taken out the 1 DMA levels after April. This average is currently placed at 244. The highest Call base at 24 has also started to witness closure The price occurrence chart suggests the stock still has room for further upsides as it is still in the bottom 5% of T-2 observations Price Price occurrence in T-2 days No. of days 3 6 day HV spread: 3 day HV to cool off Delivery Z score: recent pick-up in delivery 1 3 3D - 6D HV Spread Stock price Dec-14 9-Jan Jan-15 6-Feb-15 2-Feb-15 6-Mar-15 2-Mar-15 3-Apr Apr-15 1-May-15 3D - 6D HV Spread 15-May-15 Price 29-May Jun Jun-15 1-Jul-15 1

11 Quant Picks: Buy Motherson Sumi in range of Target price: 625. Stop loss: 466, (Time Deal frame: Team Three At months) Your Service Motherson Sumi has seen resilient price action in 215. The stock is up 15% for the year as visible in the price performance chart. The current price is in the top percentile The stock has witnessed accumulation in its recent decline towards 55. The delivery Z-Score has moved up to 1.3, the highest Z-score level since April The 3-6 day historical volatility (HV) spread may stay lower, lending upward bias to the stock. The 6D HV is declining, providing comfort. Also, the higher cool-off in 3 D HV is likely to lead to an immediate up move in the stock The current future OI in the stock has long bias and the stock has seen addition of over 2%. 3 6 day HV spread: 3 day HV yet to cool off Price Price occurrence in T-2 days: stock near record highs No. of days Delivery Z score: recent pick-up in delivery D - 6D HV Spread Stock price Z-Score Dec-14 9-Jan Jan-15 6-Feb-15 2-Feb-15 6-Mar-15 2-Mar-15 3-Apr Apr-15 1-May-15 3D - 6D HV Spread 15-May-15 Price 29-May Jun Jun-15 1-Jul Apr 22-Apr 29-Apr 6-May 13-May 2-May 27-May 3-Jun 1-Jun 17-Jun 24-Jun 11

12 Quant Picks: Buy Divis Labs in range of Target price: 226. Stop loss: 1697, (Time Deal frame: Team Three At months) Your Service Since the Nifty bottomed out near 794 in mid-june, pharma stocks have seen gradual yet constant buying. Divis Labs has also witnessed a similar trend On a T-2 basis, the price performance of the stock is in the top quartile and is seeing a constant up move Recently, the stock has started to add fresh long future positions. The futures OI in the stock had come down to multi-year lows. Fresh long creation in July is likely to lead to a higher price performance The delivery Z-score of Divis Labs suggests a pick-up in delivery. Z-score is at to.8, its highest level since May The 3-6 day historical volatility (HV) spread may stay lower, lending upward bias to the stock. The 6D HV is declining, providing comfort. 3 6 day HV spread: 3 day HV started to cool off Price Price occurrence in T-2 days: stock price in top Quartile No. of days Delivery Z score: accumulation gathering pace D - 6D HV Spread Stock price Z-Score Dec-14 9-Jan Jan-15 6-Feb-15 2-Feb-15 6-Mar-15 2-Mar-15 3-Apr Apr-15 1-May-15 3D - 6D HV Spread 15-May-15 Price 29-May Jun Jun-15 1-Jul Apr 22-Apr 29-Apr 6-May 13-May 2-May 27-May 3-Jun 1-Jun 17-Jun 24-Jun 12

13 Portfolio allocation in Derivatives Products It is recommended to spread out the trading corpus in a proportionate manner between the various derivatives research products Please avoid allocating the entire trading corpus to a single stock or a single product segment Within each product segment, it is advisable to allocate equal amount to each recommendation. For example: The Daily Derivatives product carries two intraday recommendations. It is advisable to allocate equal amount to each recommendation Stock Trader & Quant Picks recommendations should be considered in cash segment and stoploss on closing basis. Time frame for these recommendations is 3 month. Allocation Return Objective Products Product wise Max allocation Frontline Mid-cap allocation per stock Number of Calls Stocks stocks Duration Daily Derivatives 5% 2-3% 2 Stocks 1% 2-3% Intraday Weekly Derivatives 1% 3-5% 2 Stocks 3-5% 5-7% 1 Week High OI stock 5% 2-3% 2-3 Stocks 5-7% 7-1% 1-2 Weeks Monthly Derivatives 15% 3-5% 4-7 Stocks 7-1% 1-15% 1 Month Global Derivatives 5% 2-3% 1-2 index strategy Month Stock Trader/ Stock in Focus 15% 2-3% 5-6 Stocks 7-1% 1-15% 3 Months Quant Picks 1% 2-3% 2-3 Stocks 7-1% 1-15% 3 Months Alpha Trader 5% 2-3% 2-3 Alpha strategy 5% - 3 Months Volatility Insights 5% 2-3% 1-2 Strategy 8-1% 1-15% 1-2 Month Arbitrage Opportunity 5% 2-3% 2-3 Stocks > 2.5% >2.5% Event Based Positional / Daily Futures 5% 2-3% 8-12 Stocks 1-3% 2-5% 1-14 days Index option & Strategy 5% 3-4% 2-5 Nifty 2-3% days Stock option & Strategy 5% 3-4% 2-8 Stocks - 3-5% 1-14 days Currency Futures 5% 3-4% 3-5 Calls - - Intraday 13

14 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 14

15 Disclaimer ANALYST CERTIFICATION We /I, Amit Gupta B.E, MBA (Finance), Raj Deepak Singh BE, MBA (Finance), Azeem Ahmad MBA (Fin) 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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