Monthly Strategy Report October 2014

Monthly Equity Commentary

1-C NXNifty .C NX Nifty Inde x .NS E - 30/09/14

Tre nd7
8240
8220
8200
8180
8160
8140
8120
8100
8080
8060
8040
8020
8 T
7980
7960
7940
7920
7900
7880
7860
7840
7820
7800

26

27

28

02

03

04

05

08

09

10

11

12

15

16

17

18

19

22

23

24

25

26

29

30

D aily

Month Gone By

The Benchmark indices ended flat for the month of September 2014. BSE Sensex fell by
0.03% and Nifty closed marginally higher by 0.13% for the month.

Frontline Indices:
Week
No

% Chg
Sensex Nifty

+0.6

+0.7

-0.9

-0.8

+1.0

+1.0

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Key Positives
Key Negatives
India's foreign exchange reserves surged by $60.5 India HSBC/Markit purchasing managers' index for the services industry
mn to $318.64 bn during the week as foreign stood at 50.6 in August, down from 52.2 in July, indicating a slowdown in
currency assets rose, the RBI said.
the sector activity as new business expanded at a weaker pace.
HSBC Markit Manufacturing PMI for India fell to a seasonally adjusted
annual rate of 52.40, from 53.00 in the preceding quarter. Analysts had
expected HSBC Markit Manufacturing PMI to fall to 52.90 in the last
quarter.
The annual consumer price inflation (CPI) eased to India's foreign exchange reserves fell by $1.327 bn in the week to
7.8% in August, helped mainly by slower annual September 5, as the country's central bank sold dollars to prevent
increases in prices of fuel, light & clothes.
currency volatility.
After launching highway projects worth Rs 1.5 lakh
cr that were stuck on account of various regulatory
hurdles, the government is all set to roll out Rs 2
lakh cr worth of infrastructure projects this year.
India's wholesale price inflation eased to its lowest India's foreign exchange reserves fell for the second straight week as the
level in nearly five years in August. The wholesale country's central bank sold dollars to prevent currency volatility after the
1

-2.1

-2.2

price index (WPI) rose 3.74 percent year-on-year US Fed Reserves said that it may withdraw monetary easing sooner than
last month, helped to its slowest pace since October expected. Reserves fell by $1.615 billion in the week to September 12 to
2009 by a favourable statistical base and falling $315.698 billion.
global crude oil prices.
India signed a 5-year trade and economic
cooperation agreement with China with a view to
improve the trade balance and obtain $20 billion
Chinese investment into the country.
Standard & Poor's raised the outlook for India's "BBB- The Supreme Court on Wednesday cancelled all coal block allocations
minus" rating back to "stable" from "negative," except for government run blocks that operate on a non-JV basis. The
saying Prime Minister Narendra Modi government's criteria fit just four of the 218 blocks that were deemed illegal by the
"strong" mandate would allow it to implement fiscal court in its August order. Media reports said exempted coal blocks
and economic reforms.
included allocations to NTPC, SAIL and Sasan UMPP.
The government has streamlined execution of India's foreign exchange reserves fell by $101.3 mn to $315.596 bn in the
highway projects worth Rs 1.50 lakh crore and a week to Sept 19 despite a rise in non-US currency assets.
target of building 30 km of highways a day will be
achieved in another two years.

Global markets:
Indices
US - Dow Jones

Aug-14

Sep-14

%
Change

17098

17043

-0.3

US - Nasdaq

4580

4493

-1.9

UK - FTSE

6820

6623

-2.9

Japan - Nikkei

15425

16174

4.9

Germany - DAX

9470

9474

0.04

Brazil - Bovespa

61288

54116

-11.7

Singapore - Strait Times

3327

3277

-1.5

Hong Kong Hang Seng

24742

22933

-7.3

26638*

26631

-0.03

7954*

7965

0.02

Indonesia - Jakarta Composite

5137

5138

0.01

Chinese - Shanghai composite

2217

2364

6.6

India - Sensex
India - Nifty

World markets ended the month of Sept 2014 on a negative/flat note. The
worst hit were Bovespa and Hang Seng falling by 11.7% and 7.3%
respectively, while the other list of losers included FTSE, Nasdaq, Strait
Times and Dow Jones which were all down by 2.9%, 1.9%, 1.5% and 0.3%
respectively. Indices like Nikkei and Shanghai rose significantly by 4.9%
and 6.6% respectively while DAX, Nifty, Jakarta and Sensex were flat at
0.04%, 0.02%, 0.01% and -0.03%.

Average daily volumes on BSE during the month of Sept 2014 rose by 32.7%
M-o-M. (NSE daily average volumes rose by 12.3% M-o-M). The average
daily derivatives volumes on NSE rose by 6.1% to Rs. 231921.77 cr in
September.

*As on 28th Aug 2014

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Sectoral performance:

BSE Indices
Sensex
Smallcap
Midcap
BSE 500
BSE 200
BSE 100
Auto
Bankex
Capital Goods

The performance of the sectoral Indices was mixed. The top two gainers were Auto and
Healthcare, which rose by 11.6% and 8.2% respectively. The top two losers were Realty
and Metal which fell by 8.8% and 6.2% respectively.

31-Aug-14
26,638.1
10,264.5
9,298.9
10,096.1
3,233.7
8,016.7
17,293.7

30-Sep-14
26,630.5
10,681.5
9,530.4
10,173.3
3,251.8
8,015.7
17,746.9

% chg
-0.03
+4.1
+2.5
+0.8
+0.6
-0.01
+2.6

18,003.7

17,615.5

-2.2

14,913.2

14,267.7

-4.3

Consumer Durables

9,180.8

9,850.8

+7.3

FMCG

7,401.8

7,631.0

+3.1

Healthcare

13,356.9

14,352.3

+7.5

IT

10,085.9

10,687.6

+6.0

Remarks

Bank stocks declined on reports that the collective exposure of banks to coal blocks which

are under legal scrutiny and related industries stands at a whopping Rs 4 lakh crore.
The industrial activity data, measured in terms of the Index of Industrial Production (IIP)

has been below expectations which triggered a sell in this sector

Consumer durable manufacturers are expecting sales to pick up this festive season on hopes

of an economic recovery after two years of negligible sales growth.

Due to the volatility in the cyclical sector, investors are going back to defensives.
Pharma stocks rose as rupee edged lower against the dollar. Weakness in rupee could boost

Metal

12,252.7

11,409.4

-6.9

Oil & Gas

11,184.9

10,728.9

-4.1

Power
PSU

2,041.8
8,096.3

1,978.1
7,782.5

-3.1
-3.9

Realty

1,727.4

1,581.3

-8.5

TECK

5,594.3

5,918.7

+5.8

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sales of pharma companies in rupee terms as pharma firms derive substantial revenue from
exports.
The technology stocks rose on back of robust economic indicators from USA and due to the
shift from cyclicals to defensives.
Metal and mining stocks declined as a batch of weak data out of China raised concern of a
sharp slowdown in the world's second-biggest economy.
Also the Supreme Courts verdict on cancellation of 214 coal blocks, added to the pressure
in this sector
PSU OMCs fell on reports that diesel prices may be cut for first time in seven years on
declining crude oil prices.
The fall in this sector was also due to the deferment of the gas price decision by the
Government to 15th November 2014
Sector fell due to cancellation of coal blocks which would hamper power production.

Real estate stocks witnessed selling pressure after Delhi government hiked the circle rates -

- the minimum valuation at which properties have to be registered -- by up to 20 percent.

Fund Activity
Net Buy / Sell Net Buy / Sell Open Interest Open Interest
Aug -14
Sep 14
Aug -14
Sep14
Remarks
FII Activity (Rs. in Cr)
FII Activity (Rs. in Cr)
+6436.7
+5164.8
Equities (Cash)
FIIs continued to be large net buyers in Sept.
+1337.6
-3716.8
11199
11052
Index Futures
FIIs were net sellers with a flat open interest.
+11061.5
+15704.5
43573
58915
Index Options
FIIs were net buyers with rise in open interest.
+5569.3
-6167.6
44849
42355
Stock Futures
FIIs were net sellers with fall in open interest.
-670.8
-630.5
27
1545
Stock Options
FIIs were net sellers along with major rise in open interest.
MF Activity (Rs. In Cr)
MF Activity (Rs. In Cr)
Equities (Cash)
+6957.6
+4135.8
MFs were large net buyers in the month of September.
FIIs were net buyers of debt papers buying a net amount of Rs.16177.2cr of debt papers compared to Rs. 17105.5cr worth debt bought in Aug.
Particulars

Bond Yields

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Indian G-Sec bond yields ended lower by 5 bps at 8.51% at the end of September 2014
over August 2014. Bond Yields are seen falling in the near term, due to the Reserve Bank
of India's (RBI) steps to further develop the government securities (G-sec) market and
enhance liquidity. Bond Prices rose on GoIs borrowing program for the second half
coming in lower than expectations this offset selling pressure as investors pared
positions ahead of the central bank's monetary policy review on 30th September, while
weakness in the local currency also hurt and also worries about earlier-than-expected
U.S. rate hikes, which could dent the big foreign inflows into Indian shares and debt
markets.

Commodities

In September 2014, the Reuters/Jefferies CRB Index of 19 raw materials ended lower by
4.85% to close at 279. The Reuters/Jeffries CRB Index fell on account of a fall witnessed
in commodities like Wheat (down 35.06%), Corn (down 15.1%), Nickel (down 10.6%),
Cotton (down 10.0%), Heating Oil (down 7.4%), Aluminium (down 6.8%), Gold (down
5.8%), Crude Oil (down 5.0%), Copper (down 4.1%), Coffee (down 3.9%), and Sugar (down
0.1%). However, Silver, Lean Hogs, Live Cattle, Natural Gas and Cocoa were all up by
13.0%, 11.0%, 4.6%, 3.0%, and 2.7% respectively.

Behaviour of commodity prices (including LME 3 month buyer prices for base metals)
during the month ended September 2014 is given below. All of the base metal prices
closed negative for the month of September.

Behaviour of commodity prices (including LME 3 month buyer prices for base metals) during the month ended September 2014:
Commodity

30-Sep-14

29-Aug-14

Reasons

% Chg

Gold fell to its lowest as a stronger dollar outweighed any safe-haven demand from lower equities and

heightened tensions over Ukraine.

Prices traded near its lowest level in two-and-a-half months on robust U.S. economic data that curbed the

metal's safe-haven appeal.

Bullion posted its longest losing streak since April 2013, after the U.S. Federal Reserve indicated it could raise

Gold

1,212

1,287

interest rates sooner than expected earlier this month.

-5.82%

The Federal Reserve increased its estimate for the target rate on overnight loans between banks amid signs

Crude Oil

91

96

-5.00%

Aluminium

1,969

2,113

-6.84%

Copper

6,686

6,970

-4.07%

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that the U.S. economic recovery is gaining traction and also it raised its estimate for a key lending rate even
as policy makers affirmed a pledge to keep borrowing costs close to zero percent for a considerable time
which weighted on the gold price.
The dollar's rally to a 13-month high dampened demand for the precious metal as an alternative investment
WTI crude oil prices dipped as a disappointing US jobs report tempered the sentiment over demand in the
worlds top crude consumer and as dealers digested a mixed US inventory report and a new round of interest
rate cuts by the European Central Bank, while keeping a watch on the Ukraine conflict.
Oil prices came under pressure on concerns about fragile demand, flush global supplies and a surging US
Dollar.
Prices closed at their lowest level since November 2012 on its biggest one-day drop in nearly 23 months.
Slack demand for oil, a slew of weak macroeconomic data out of China and the eurozone, a stronger dollar as
well as plentiful supplies that include surging output from Libya dragged prices lower in the quarter.

Copper slid to its lowest in almost three months after Chinese inflation data showed more signs of cooling

growth in the world's top metals user and prices looked vulnerable to further losses given looming supply
growth
Prices fell under pressure as weak factory data from China raised concerns about the outlook for demand from
the world's top metals consumer.
5

 The industrial metal slipped amid signs of ample supply in the world's top copper user, and expectations of

steadying demand into the end of the year.

Zinc

2,290

2,360

-2.97%
Nickel prices tumbled on speculation that a ban of ore exports wont occur anytime soon by the Philippines,

the largest supplier to China and because of higher dollar price.

Nickel

16,595

18,570

-10.64% Speculators indulged in booking profits at prevailing levels ignoring the metal's gains overseas.
Besides, low demand from alloy-makers and other consuming industries in domestic spot markets, weighed on

Tin
Lead

20,300
2,092

21,875
2,251

-7.20%
-7.06%

prices.

Currencies

Tin prices dropped to a 13-month low on stockist selling amidst reduced demand from alloy industries.

The Baltic Dry Index (BDI) lost 7.32% in the month to close at 1063. BDI is a number
issued daily by the London-based Baltic Exchange. Not restricted to Baltic Sea countries,
the index provides "an assessment of the price of moving the major raw materials by sea.
Taking in 23 shipping routes measured on a time charter basis, the index
covers Handysize, Supramax, Panamax, and Capesize dry bulk carriers carrying a range of
commodities including coal, iron ore and grain. The main sea freight index at Baltic
Exchange for bigger vessels dropped mainly due to a fall in capesize and panamax rates.

The USD mostly ended on Positive note vs other currencies in September 2013. The dollar
hit a four-year high against a basket of major currencies, putting the greenback on track
for its biggest quarterly gain in six years, and a two-year high against the euro after
consumer prices in the euro zone rose 0.3 percent year-on-year, slowing from 0.4
percent annual increases in August and July.

Given below is a table that shows the depreciation (-)/appreciation (+) of the dollar against various currencies for the month of
September 2014:
30-Sep-14 31-Aug-14
USD to:
Pakistani rupee
103.99
103.17
Hong Kong dollar
7.76
7.75
Chinese yuan
6.16
6.15

% Chg
0.8%
0.2%
0.0%

Reasons

The Indian rupee fell posting its worst month since the record low levels of August 2013, as the

Indian rupee

61.59

60.53

1.8%

Taiwan dollar

30.47

30.76

-0.9%

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dollar continued to strengthen against emerging market currencies over growing bets for an early
hike in U.S. interest rates.
The Currency fell the most in more than a month on speculation an improving U.S. economy will
prompt the Federal Reserve to bring forward its timetable for increasing interest rates.

Singapore dollar
Argentine peso

1.27
8.49

1.25
8.49

2.0%
-0.1%
The euro fell to a new two-year low against the dollar after data showed euro zone annual inflation

at 0.3 per cent in September.

Euro

0.79

0.76

3.5%

The euro depreciated on the prospect of diverging monetary policy between the Federal Reserve

and the European Central Bank as rate differentials swing decisively in the greenback's favor.
The euro also dropped after a report showed German business confidence fell more than forecast,

fueling bets the European Central Bank will add further monetary stimulus.
Thai baht

32.42

32.66

-0.7%
Malaysias ringgit fell by the most in a year and led losses in Asia on concern a strengthening U.S.

Malaysian ringgit

3.28

3.16

3.6%

economy will prompt the Federal Reserve to bring forward its timeline for raising borrowing costs.
Investor sentiment weakened following a slowdown in Chinese industrial production in August also

weighed on currency.
The rupiah weakened against dollar for the first time since June on speculation foreign investors

Indonesian rupiah 12195.10

11709.60

4.1%

Japanese yen

109.45

104.10

5.1%

Brazilian real

Korean won

2.44

2.27

7.5%

1055.19

1040.37

1.4%

will cut their holdings of Indonesian assets as the Federal Reserve moves toward raising borrowing
costs.
Rupiah declined after global funds pulled money from local stocks in anticipation of an increase in
U.S. interest rates.
The Currency also fell to a seven-month low after the passage of a law scrapping direct elections for
local officials spurred outflows from Indonesias stock market.
The Japanese yen fell against the other major currencies as strong US economic data released last
week boosted investors' sentiment.
The yen fell to the lowest level versus the dollar in almost six years on speculation faster economic
expansion in the U.S. will convince the Federal Reserve to raise borrowing costs, while the Bank of
Japan maintains monthly bond buying to keep rates low to bolster growth.
Japans currency was set to complete a four-week loss as demand for the greenback climbed after
data showed U.S. service industries expanded in August at the fastest pace in nine years.
The Brazils real touched its lowest level fell to a five-year low on speculation it may be hard to
pull the economy out of recession as the much-maligned President Dilma Rousseff appears to be
gaining more support ahead of the October elections.
The currency was the worst performance among 31 major currencies.
The decline was the biggest among 24 emerging-market currencies tracked by Bloomberg.
The dollar has been gaining over the past three months on expectations that the Federal Reserve is
moving closer to raising U.S. interest rates from near zero for the first time since the financial
crisis.
(Data Source:www.oanda.com)

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Comparison of Equity Returns in various markets - MSCI Indices in US$ terms

MSCI Index
BRIC

Last

MTD

3MTD

YTD

1 Yr

MSCI Index

Last

MTD

3MTD

YTD

1 Yr

274.2

-9.4%

-4.3%

-1.5%

-0.1%

EUROPE

1,685.8

-3.8%

-7.4%

-4.2%

3.0%

1,005.3

-7.6%

-4.3%

0.3%

1.8%

G7 INDEX

1,501.2

-2.5%

-2.0%

2.8%

11.3%

EM ASIA

460.1

-6.0%

-2.5%

3.1%

6.7%

WORLD

1,698.4

-2.9%

-2.6%

2.3%

10.0%

EM EUROPE

374.4

-6.1%

-13.9%

-14.4%

-16.0%

EM (EMERGING MARKETS)

EM EUROPE & MIDDLE EAST

320.6

-4.9%

-11.0%

-13.8%

-15.4%

AUSTRALIA

846.1

-11.9%

-9.1%

-3.2%

-4.9%

3,170.5

-13.5%

-5.9%

-1.0%

-4.0%

PORTUGAL

77.7

-9.7%

-25.2%

-21.8%

-20.8%

AUSTRIA

951.9

-9.4%

-21.8%

-25.4%

-23.4%

CHINA

61.7

-6.8%

0.3%

-2.3%

1.4%

NEW ZEALAND

131.9

-7.8%

-10.4%

0.5%

-4.1%

INDIA

500.6

-1.5%

1.6%

22.9%

35.4%

HONG KONG

9,510.4

-7.7%

-3.3%

-0.7%

2.3%

INDONESIA

823.1

-3.1%

3.3%

23.7%

17.5%

CANADA

1,843.2

-6.7%

-4.9%

5.0%

8.6%

KOREA

423.3

-8.2%

-7.3%

-4.3%

-0.5%

NORWAY

3,095.2

-5.8%

-7.9%

0.0%

5.5%

MALAYSIA

494.3

-4.8%

-4.1%

-2.6%

2.0%

UNITED KINGDOM

1,319.0

-5.3%

-6.9%

-4.1%

2.3%

PHILIPPINES

574.8

0.4%

3.7%

23.0%

16.7%

GERMANY

1,966.3

-4.2%

-11.2%

-11.8%

-0.1%

TAIWAN

304.9

-7.0%

-5.5%

5.2%

9.7%

SINGAPORE

4,151.6

-4.1%

-2.4%

0.5%

0.7%

THAILAND

423.1

0.0%

6.7%

21.0%

8.3%

FRANCE

1,642.7

-3.7%

-8.5%

-6.0%

-0.7%

BRAZIL

2,170.3

-19.4%

-9.2%

-2.2%

-8.3%

529.3

-3.1%

-7.8%

2.8%

13.9%

CHILE

1,669.2

-2.6%

-7.9%

-9.4%

-16.1%

COLOMBIA

1,049.7

-10.4%

-8.7%

1.1%

-10.6%

MEXICO

7,163.4

-4.2%

1.8%

2.7%

9.8%

700.5

0.4%

1.1%

17.8%

25.3%

PERU

1,214.1

-6.4%

-1.7%

10.2%

13.3%
1,077.7

16.4%

25.3%

57.2%

63.8%

985.4

14.4%

-16.7%

-32.2%

-29.3%
50.6%

EM LATIN AMERICA

CZECH REPUBLIC

404.0

3.4%

1.7%

9.6%

8.7%

99.6

-12.6%

-20.0%

-16.0%

-7.5%

HUNGARY

377.4

-1.7%

-12.8%

-19.2%

-24.3%

POLAND

859.0

0.4%

-4.4%

-3.3%

-0.1%

RUSSIA

611.1

-5.8%

-17.3%

-22.3%

TURKEY

477.4

-12.1%

-11.8%

EGYPT

933.0

5.7%

28.0%

SOUTH AFRICA

530.4

-9.6%

-7.2%

1,148.9

3.5%

572.2

5.2%

GREECE

QATAR
UNITED ARAB EMIRATES

Global markets end on a

negative note; Developed &
Emerging
Markets
fell,
Frontier markets ended flat

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SPAIN
Frontier Markets
FM (FRONTIER MARKETS)
BANGLADESH
GHANA
ARGENTINA

2,616.8

11.3%

2.6%

27.6%

MOROCCO

306.3

3.8%

4.7%

5.3%

7.5%

-22.2%

OMAN

892.6

2.4%

9.2%

13.9%

15.4%

4.7%

-10.2%

SRI LANKA

264.9

2.4%

13.6%

15.8%

24.4%

38.1%

64.8%

BULGARIA

177.7

-6.3%

-12.0%

0.8%

20.5%

0.2%

1.9%

ROMANIA

510.2

-7.1%

-10.3%

2.3%

10.4%

17.7%

22.7%

31.1%

VIETNAM

459.1

-7.6%

2.0%

11.2%

13.7%

22.9%

42.2%

69.1%

ESTONIA

566.8

-9.1%

-17.1%

-28.6%

-31.5%

The Equity markets across the globe ended the month of September 2014 on a negative
note. The Developed markets ended lower in the range of 2.9-3.8% with Europe being a
top loser, down 3.8% (followed by World & G7, which fell 2.9% & 2.5% respectively).
Emerging markets fell 7.6%, led by EM - Latin America & EM BRIC, down 13.5% & 9.4%
respectively. EM Asia, EM Europe and EM - Europe & Middle East underperformed,
8

reporting decline of 6.0%, 6.1% & 4.9% respectively. Growth in Frontier markets was
moderate at 0.4% during the month.
Estonia & Vietnam pull the
Frontier markets lower; but
Bangladesh, Ghana & Argentina
restrict index losses

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Amongst the Frontier markets, Estonia, Vietnam, Romania & Bulgaria were the top losers,
which fell by 9.1%, 7.6%, 7.1% & 6.3% respectively. However, the index fall was limited,
as selective markets like Bangladesh, Ghana & Argentina outperformed, rose by double
digit 16.4%, 14.4% & 11.3% respectively. Morocco, Oman, Sri lanka also rose by 3.8%, 2.4%
& 2.4% respectively.
Dhaka stocks rebounded due to investors optimistic share purchasing expecting better
returns. It managed to sustain the positive vibes as fresh fund injection through various
sources continued. Fresh funds were coming to the capital market from the banking
sector as the banks interest rate on deposit declined significantly in recent times.
Bangladesh exports in August rose 7.25 percent from a year ago to $2.16 billion, driven
by an increase in readymade garment exports and ending a brief slowdown in July.
Bangladesh's trade confidence rose sharply, by 38 points in six months, which is the
second highest among 23 countries globally. The jump was due to growing demand for its
garments from Western buyers and the recent initiatives aimed at making the country's
apparel factories safer. HSBC's latest Trade Confidence Index, which was published
recently, shows that Bangladesh's score increased to 141 in the first half of 2014, from
103 in the second half of 2013.
There was continued recovery in the Ghanaian stock market as the benchmark GSE
Composite Index moved northward, reflecting a better year-to-date gain in local
currency. The sustained recovery was driven by rising confidence in the Ghanaian banking
sector.
Argentinas senate mulled a bill to sidestep the U.S. court ruling that resulted in
Argentinas July debt default, and a handful of local stocks including banks rallied.
Despite the debt crisis Argentinas stock market has soared, yielding some of the biggest
gains in the world in recent weeks as investors dodge capital controls by buying equities
in local currency that can be sold abroad for dollars, as well as seeking refuge from
inflation that is close to 40 per cent. The rally was also fuelled by the governments
moves to win back market confidence after settling long-running disputes with investors,
as well as speculation that electricity tariffs would be unfrozen, providing a particular
boost for energy companies.

Brazil, Columbia, Peru, Mexico

& Chile underperformed led to
Latin American index fell

Vietnamese stocks fell on account of waned liquidity & after economic data from HCM
City showed the consumer price index increased sharply from August. September's index
rose 1.13 per cent above last month and 3.16 per cent over the same period last year.

Amongst the Emerging markets, EM-Latin America & BRIC were the top losers, down
13.5% & 9.4% respectively.
The fall in the EM Latin America were led by Brazil, Columbia, Peru, Mexico & Chile,
which registered fell of 19.4%, 10.4%, 6.4%, 4.2% & 2.6% respectively.
Brazilian markets got hammered ahead of election. Brazil's stock market and currency
were sent reeling by signs President Dilma Rousseff is pulling ahead of her main
challenger in the country's presidential election next month. A poll released by research
firm Datafolha showed Rousseff with 47 per cent of voter intention against Silva's 43 per
cent in a potential second-round runoff. Silva had once led by as much as 10 points in a
potential runoff. Another poll released showed Rousseff with 47.7 per cent in the second
round, against Silva's 38.7 per cent. Brazilian investors have been heavily critical of
Rousseff's government for implementing policies that have gone against minority
shareholder interests in state-run companies and a tendency to enact one-off stimulus
measures rather than structural reforms.

BRIC markets underperformed Brazil, Russia, India & China

Retail Research

The fall in the BRIC index was driven largely by Brazil, China, Russia & India (down 19.4%,
6.8%, 5.8% & 1.5% respectively).
Chinese stocks fell on poor economic data. The latest indicator of China's deceleration
with a sharper-than-expected drop-off in industrial production for August to 6.9% yearover-year, the slowest pace since 2009, during the global financial crisis, a sign of
renewed weakness in the worlds second-largest economy. Several financial institutions
lowered their growth forecasts for China's economy. Chinas economy has been slowing
for several years, but a sharp correction in real estate markets in recent months has led
to concern that the slowdown could turn into a more severe slump.
Russian shares fell, bucking the trend on other stock markets, amid concern that Western
sanctions over Ukraine are imposing a heavy toll on Russia's economy. Russian stocks
dropped the most in seven weeks as AFK Sistema lost more than a third of its market
value after billionaire owner Vladimir Evtushenkov was placed under house arrest on
suspicion of money laundering. The arrest is worsening investor sentiment already reeling
from the crisis in Ukraine after the U.S. and European Union expanded sanctions on
Russian companies and individuals this month.
10

Korea,
Taiwan,
underperform

China

Turkey, Greece & Russia pull EM

Europe & Middle East index
lower; Czech Republic, Qatar &
UAE limit the losses.

Retail Research

Among the EM - Asia, Korea, Taiwan, China, India, Indonesia, Malaysia were the top
losers, down 8.2%, 7.0%, 6.8%, 1.5%, 3.1% & 4.8% respectively. Philippines & Thailand
closed moderately by 0.4% & 0.0% respectively.
Korea shares fell on concerns over tepid exports. South Korean shares ended in negative
territory as tensions in Hong Kong spurred risk-averse sentiments. South Korean shares
ended lower as foreign investors continued to sell local stocks amid worries about foreign
exchange losses caused by the depreciation of local currency to the U.S. dollar. China is
South Korea's largest export destination, and government officials worry that any sharp
slowdown there could knock South Korean exporters. Analysts are also wary of the
looming earnings season, which is expected to underline the tough times for the
corporate sector.
Among the EM Europe and Europe & Middle East, Turkey, Greece and Russia were the
top losers, down 12.1%, 12.6% & 5.8% respectively in September. Hungary fell marginally
by 1.7%. However, Czech Republic, Qatar & UAE outperformed, up 3.4%, 3.5% & 5.2%
respectively, which restricted further index losses. Poland was flat at 0.4%.
Turkish stocks fell the most in the world while the lira and government bonds dropped on
concern higher U.S. interest rates next year will curtail appetite for riskier assets.
Turkish assets have come under pressure, with the lira posting the third-biggest drop in
emerging Europe and Africa, as investors weighed prospects for the Federal Reserve to
start increasing borrowing costs. U.S. policy makers raised their estimates for future
interest rates, while retaining a pledge to hold them near zero for a considerable time.
Turkey is among countries most vulnerable to shocks from higher U.S. rates.
Fitch downgraded Greeces sovereign debt rating from 'CCC' to 'C'. Fitch considers that
the proposal to reduce Greece's public debt burden via a debt exchange with private
creditors will, if completed, constitute a rating default, and result in the country's IDR
being lowered to Restricted Default ('RD') upon completion.
MSCI upgraded the UAE and Qatar from frontier to emerging market status in May and
arranged for frontier funds to exit those countries through a series of monthly sales.
United Arab Emirates and Qatar rebounded on Dubai developer Emaar Properties surged.
The initial public offer of Emaar's malls and retail unit will be one of the largest equity
sales in the Middle East since 2008, underlining Dubai's recovery from a credit crisis that
forced many state-linked developers to stall projects.
11

Australia, Portugal, Austria top

losers amongst the developed
markets

Among the developed markets, Australia, Portugal, Austria, Newzealand & HongKong
were the top losers, down 11.9%, 9.7%, 9.4%, 7.8% & 7.7% respectively. Israel grew at a
decent rate by 1.7%. Further, the index fell due to underperformance from markets like
Canada, Norway, UK, Germany, Singapore, France and Spain, which fell by 6.7%, 5.8%,
5.3%, 4.2%, 4.1%, 3.7% & 3.1% respectively.
Australia stock fell after the U.S. Federal Reserve signaled a move to higher interest
rates is ahead. The Australian share market closed lower taking a hit as international
investors pool their money in a strengthening US economy.
The geopolitical anxiety in the EU could have influenced the drop in markets after the EU
governments stopped the new Russian sanctions.
European stock markets have fallen and the euro has struck its lowest level against the
US dollar for almost two years as investors worried about unrest in Hong Kong ahead of
an ECB meeting. Tensions in Hong Kong were cited as the main reason for the overall
risk-aversion seen throughout the month, with US stocks extending declines on the civil
unrest.
Hong Kong stocks fell, with the benchmark index capping its biggest two-day drop since
February, as major streets in the city center remained barricaded by protesters for a
third day. Shares extended their drop after a Chinese manufacturing gauge fell from the
preliminary level reported earlier. The MSCI Hong Kong Index lost 0.8 percent, bringing
its decline from an Aug. 20 high to more than 10 percent. Hong Kongs stock market
remains under a correction mood because of political jitters.

Outlook going forward

Global Market Outlook
Fed hints at steeper rate hike path,
could impact the emerging markets
in near term

Retail Research

In its recent FOMC meet, the Fed Reserve renewed its pledge to keep interest rates near
zero for a considerable time, but also indicated it could raise borrowing costs faster than
expected when it starts moving. Many economists and traders had expected the U.S.
central bank to alter the rate guidance it has provided since March, given generally
improving data on the economy's performance. But the Fed repeated its assurance that
rates would stay ultra-low for a "considerable time" after a bond-buying stimulus program
ends. In a statement after a two-day meeting of its policy-setting Federal Open Market
Committee, it announced a further $10 bn reduction in its monthly purchases, leaving the
program on course to be shuttered next month.
12

EU to keep Russia sanctions in

place over Ukraine

Retail Research

The statement was virtually unchanged from July, though new quarterly projections
released with it showed the central bank's view on where interest rates should be in
future years is diverging from where financial markets have bet they will be. While the
much analyzed phrase 'considerable time' remained in the FOMC statement, the newly
announced scheme for interest rate normalization shows that higher rates are on the
cards. The most significant change was the new rate projections, which suggested
officials were positioning themselves for a potentially faster pace of rate hikes than they
had envisioned when the last set of forecasts were released in June.
The recent economic data in US has been much better than expected. GDP grew by 4.6%
in Q2CY14. U.S. manufacturing activity hovered at a near 4-1/2-year high in September
and factory employment surged. A measure of U.S. consumer confidence reached its
highest level since July 2013. Further, initial claims continue to hover near an eight-year
bottom amid a very low rate of layoff. This gives further evidence that interest rates
hikes could be faster once it starts. We expect the rate hikes to begin sometime in
H1CY15.
The fear of rise in the rates earlier than expected could start to negatively impact the
global markets in the near term. The increase in the interest rates in US could result in
outflow of funds from the emerging markets / other developed markets, as it would
become less profitable to borrow money in US and invest abroad. However, the rise in
rates could somewhat benefit the US markets as people would invest in US equities on a
signal that the US economy has turned around.
While the global markets could be impacted, we dont expect the damage to be
significant. The policy makers would ensure that no hard landing might happen.
The EU is to keep sanctions against Russia in place, judging that Ukraine's peace deal is
not fully effective. EU ambassadors who met recently had noted some encouraging
developments since the 5 September ceasefire was agreed. However, it seems other
parts of the peace deal would need to be properly implemented.
The sanctions target senior Russian officials, as well as Russia's oil industry, defence firms
and banks. Western governments and the Ukrainian authorities in Kiev accuse Russia of
supplying the separatist rebels in eastern Ukraine with heavy weapons and soldiers.
However, Russia denies the allegations. EU and US sanctions have been in place since
Russia's annexation of Crimea in March. At least 3,200 people have died in fighting since
April in Ukraine's Donetsk and Luhansk regions, and thousands of civilians have fled the
13

Escalation of US-Syria conflict could

result in investors turning away
from riskier assets

Retail Research

conflict. A shaky ceasefire has held since 5 September, and the two sides have since
agreed to set up a 30km buffer zone. But there have been frequent flare-ups of violence.
Last week Ukraine's Prime Minister, Arseniy Yatsenyuk, told the UN General Assembly
that Russian troops were still operating in eastern Ukraine. He urged the West not to lift
sanctions until his country regained control of all its territory. Both the US and the EU
have said sanctions could be lifted if the situation on the ground improves sufficiently.
Japan said recently that it was imposing additional sanctions on Russia because of its
involvement in the Ukraine conflict and that it had also formally protested at the visit to
a contested island by an aide to Russian President Vladimir Putin. The new measures
include banning certain Russian banks from issuing securities in Japan and stepping up
inspections to prevent arms being shipped to Russia, Chief Cabinet Secretary Yoshihide
Suga said.
EU is Russias biggest global trading partner, a net importer in a relationship dominated
by oil and gas. Europes dependence on Russia, energy wise, also makes the continent
vulnerable. Crude petroleum and natural gas was the biggest Russian import for 21 of the
28 E.U. member states last year. Of the major European countries, Germany is most
exposed to the Russian risk. Russia is a major client for German electricity plants, gas
turbines and agricultural machines. At a time when the eurozone is still recovering from
recession, the uncertainty could rapidly spread from specific sectors to the economy as a
whole. The delay in lifting up the sanctions on Russia / continued sanctions on Russia
could delay the recovery in Europe.
As US and allied warplanes continued to strike targets inside Syria, the Obama
administration is marshalling support for a war that is more and more explicitly aimed
against the regime of Syrian President Bashar al-Assad, rather than the Islamic State of
Iraq and Syria (ISIS).
The battle for the Syrian Kurdish city of Korbani near the northern border with Turkey
has become the pretext for the Turkish mobilisation of tanks and troops in preparation
for a possible incursion into Syria. The Turkish government is preparing its own military
intervention as part of the escalating US-led war. The Turkish government has mooted
the establishment of a buffer zone inside Syria and also called for a no-fly zone over
areas of Syriaan appeal that the Obama administration now declares it is considering.
The creation of a no-fly zone is transparently directed against the Assad regime and the
Syrian military, the only force inside the country that has war planes.
14

Why US dollar has re-emerged as

preferred currency for global
investors

Retail Research

Over the past three years, Turkey has been a source of support for anti-Assad militias,
including ISIS, as well as a transit country for fighters, finance and arms flowing into Syria
from other countries. While the Obama administration has called on the Turkish
government to close its borders with Syria, it has used its NATO ally for the same supply
purposes. The CIA jointly operates a centre inside Turkey, known as the Military
Operations Command, through which it has helped arm and support the Western-aligned
opposition inside Syria.
The US was joined by its "coalition partners", Bahrain, Saudi Arabia, Jordan and the
United Arab Emirates in an attack against ISIS in Syria, the first attack conducted
alongside Middle Eastern countries. The US has been carrying out strikes in Iraq against
the militant group since last month and in Syria since last week with the help of Arab
allies. It aims to destroy the bases and forces of the al-Qaida offshoot that has captured
large areas of both countries.
The escalation of the conflict will of course raise questions over the risk appetite of
many within the markets, who are no doubt worried about a major war which appears to
be unfolding. Due to this increased geopolitical tension (along with other tensions like
continued sanctions on Russia and present unrest in Hong Kong) could result in investors
turning away from riskier assets and beginning to invest in safe havens. U.S. lawmakers
have urged congressional action to back Obama's Syria war. The political analysts warn
that continued war between US and Syria could dampen participation by anti-war
Democrats in the November elections.
President Barack Obama's handling of the economy may be reviled by his political
opponents, but he is receiving support from a surprising quarter: foreign exchange
traders. The US dollar, after one of its most prolonged weak spells ever, has now reemerged as the preferred currency for global investors. Across trading desks in New York,
London and elsewhere, analysts are rushing to raise their dollar forecasts based on the
resurgence in the US economy. In part, this bullish mood is tied to signals from the
Federal Reserve that it will soon stop its bond-buying program - a change that would lift
interest rates and buoy the dollar. Yet the recent rally in the dollar, which has gained
about 3.2% against the euro since Aug. 20 and about 8% against the yen since July 1,
underscores expectations that the US economy will continue to grow at a faster clip than
that of Europe, Japan and even large emerging markets, all of which are seeing their
economies stagnate.
15

Recent unrest in Hong Kong could

also impact markets in near term

Retail Research

The increasing push by investors into the dollar can be seen as a favorable report card on
the US economy, highlighting good performance in crucial benchmarks such as growth
and fiscal responsibility, and an increasingly competitive position abroad because of a
boom in energy exports. As long as the US continues to grow and the rest of the world
remains stagnant, the dollar would continue to rally.
Past periods of dollar strength came when the dollar's status as a reserve currency was
more firmly entrenched. More than a decade of easy US credit, the start of the euro and
China's emergence as an economic colossus made the dollar less popular for global
central banks, which diversified into euros, the renminbi and other alternatives. Now,
with the Federal Reserve cementing its role as a lender of last resort to central banks all
over the world, the dollar is poised to recapture lost ground as the preferred currency for
central banks.
However, a strong dollar is not always a plus. Over time, it can stall economic growth by
hurting exports, although economists point out that even with its recent spurt the
currency remains undervalued in historical terms. Another consequence of a stronger
dollar is currency instability in emerging markets. As currencies like the Turkish lira, the
Brazilian real and the Chinese renminbi weaken, investors will be less willing to hold on
to their assets in these countries - choosing instead to park their money in higher-yielding
US dollar assets.
Recent unrest in Hong Kong is spooking markets for fear it could escalate, challenging
Beijing to make a measured political response, at a time when Chinese and global growth
are at the heart of market anxiety. There are worries that if the unrest prolongs, then it
could impact Chinas growth, which could in turn have an impact on growth of other
economies who are major trading partners of China. That has made investors uneasy.
China would not likely risk harming Hong Kong's important economic role as a gateway for
trade into the mainland. It is also a key banking hub, where Chinese banks and companies
seek offshore funding. The big fear currently is that this proves too much for Chinese
officials so they sacrifice reform for stability, so they slow down financial reforms and
other types of reform. We feeI that is the risk people are not clear about. Hong Kong's
role as a financial centre is critical to Chinese companies.

16

Indian Market Outlook

India unlikely to see
upgrade in the near term

ratings

Obama, Modi
strategic ties

vow

Retail Research

to

boost

India received a shot in the arm as global rating agency Standard & Poor's recently
revised India's credit outlook to "stable" from "negative", acknowledging the improvement
in the countrys economic environment. The revision was backed by an improvement in
Indias external position and growth prospects and means its no longer on the brink of a
"junk" rating. S&P was the last of the three main global ratings agencies with a negative
outlook on India; Moodys never changed Indias outlook, while Fitch upgraded it to
stable in 2013.
Although Moodys outlook on India remains stable, Andrew Colquhoun, Head of AsiaPacific Sovereign Ratings Group at Fitch Ratings doesn't see any chance of an alteration
in ratings for India in the medium-term. Moody's also does not expect a change in rating
for India soon. The agency will look at Reserve Banks views on inflation trends, macro
outlook and growth sustainability before any ratings action.
Mr. Andrew stated that on the Budget front, it was interesting that the new government
reaffirmed the outgoing governments fiscal deficit target. However, he stated that from
his perspective, it remains a challenging target. In particular, there is an assumption for
divestment revenue that is quite optimistic. Recent experience has been that when
divestment revenues fall short the government responses by coming back on capital
spending to keep the deficit within target and that is obviously something that has an
impact on longer term growth prospects. So it remains to be seen whether the new
government can find more supportive formula on the fiscal front.
On the growth outlook, Fitch stated that it expects it to accelerate but it would focus
more on its sustainability, especially during times when global conditions turn less benign
or if there is a domestic shock of one kind or another. So its focus would be more on the
quality of growth acceleration, how much it is supported by increase in savings, increase
in investment and increase in productivity most importantly.
U.S. President Barack Obama and new Indian Prime Minister Narendra Modi vowed
recently to expand and deepen their countries' strategic partnership and make it a model
for the rest of the world. In a joint "vision statement" issued after their first meeting at a
White House dinner, the two leaders said they would work together not just for the
benefit of both our nations, but for the benefit of the world. They said their countries
would cooperate on security and to fight terrorism and would back a "rules based" global
17

Rates cuts unlikely over the next

few months; however, markets
have discounted the same

Retail Research

order in which India assumes greater multilateral responsibility, including a reformed

U.N. Security Council.
They also vowed to work together against the threat posed by climate change and to
cooperate to address the consequences of unchecked pollution. The two leaders also said
their countries would work to ensure that economic growth brought better livelihoods for
all people and stressed the importance of open markets and fair and transparent
practices to allow trade to flourish. Washington has been keen to expand business and
security ties with India, which it sees as a key counterbalance to an increasingly assertive
China in Asia. Obama has backed New Delhi's bid to become a permanent member of the
U.N. Security Council.
As part of an effort to spur foreign investment, Mr. Modi met many U.S. corporate
leaders and told them he was committed to liberalizing India's economy, which has
underperformed other emerging markets recently after years of breakneck growth.
Whether Modis visit to US would translate into fund and technology inflow into India will
be watched carefully over the new few months.
RBI Governor Raghuram Rajan, on Sept 30, 2014, kept key rates unchanged in its fourth
bi-monthly monetary policy. It kept the policy repo rate under the liquidity adjustment
facility (LAF) unchanged at 8% and the cash reserve ratio (CRR) of scheduled banks
unchanged at 4% of net demand and time liabilities (NDTL); RBI said that since June,
headline inflation has ebbed to levels which are consistent with the desired near-term
glide path of disinflation 8% by January 2015.
RBI said in the statement that most heartening feature has been the steady decline in
inflation excluding food and fuel, by a cumulative 111 basis points since January 2014, to
a new low. It added that with international crude prices softening and relative stability
in the foreign exchange market, some upside risks to inflation are receding. However, it
said that yet, there are risks from food price shocks as the full effects of the monsoons
passage unfold, and from geo-political developments that could materialize rapidly.
RBI said that turning to the medium-term objective (6% by January 2016) the balance of
risks is still to the upside, though somewhat lower than in the last policy statement. It
said that this continues to warrant policy preparedness to contain pressures if the risks
materialize. Therefore, it said that the future policy stance will be influenced by the
Reserve Banks projections of inflation relative to the medium term objective (6% by
January 2016), while being contingent on incoming data. RBI also said that in order to
further develop the government securities market and enhance liquidity, it has been
18

Q1FY15 results were good, focus

would now shit to Q2FY15 earnings

FII flows could moderate in near

term
because
of
ongoing
geopolitical tensions & fears of
interest rate hike in US

Retail Research

decided to bring down the ceiling on SLR securities under the held to maturity (HTM)
category from 24% of NDTL to 22% in a graduated manner.
From RBIs policy statement, it seems that there are upside risks to inflation in the next
few months. Hence we feel RBI is unlikely to cut the interest rates over the next few
months and would continue to focus on inflation trends. The current financial year might
end up being the first in seven years to see the RBI keeping the benchmark repo rate
unchanged. However, this is unlikely to impact the markets in the near term as the same
has already been discounted. Infact any positive surprises could boost the sentiments.
India Inc had an impressive quarter in Q1FY15. Following the positive trend seen in
Q4FY14, Indian corporate sector saw earnings acceleration in Q1FY15. This was led by
sectors like auto, IT, pharma and FMCG that continued to show strong earnings growth.
According to data compiled by Care Ratings, over 1,204 companies have registered a
substantial growth of 33.4% at Rs 62,040 cr in net profit for the first quarter of this fiscal.
This is against 8.8%, at Rs 46,792 cr, registered in the corresponding quarter of fiscal
2014. During the quarter, total net sales grew 12.8% at Rs 5,54,426 cr against 4.8% or Rs
4,91,689 cr in Q1FY14.
The June quarter had an advantage of lower growth in the corresponding quarter of the
prior fiscalthe base effect. Sustaining the high profit growth trend in the coming
quarters may be difficult because of the high base effect. The real test will come in the
remaining three quarters of the fiscal since it will be compared with the more robust
performance in the corresponding quarters of the previous year.
Focus would shift to Q2 (July-Sept 2014) earnings which would kick start from second
week of October. We dont expect any material improvement in the sales & profit growth
on Y-o-Y basis in Q2. However, certain sectors like IT & Healthcare could do well because
of recent depreciation of INR (vs. USD).
The Indian markets have witnessed strong FII flows over the last one year on expectations
that the new Modi led NDA Government would turnaround the slowing economy. The
FIIs were reported net buyers to the tune of Rs. 843.5 bn over Jan-Sept 2014. However, it
should be noted that though healthy, the FII buying has moderated over the last three to
four months (Rs. 109 bn in June; Rs. 114 bn in July; Rs. 64.4 bn in Aug; Rs. 56.1 bn in
Sept, compared to Rs. 165 bn in May 2014).
With the two major events viz; Elections & Budget already over, we feel the focus would
now shift to fundamentals and execution. In the near term FII flows could moderate
19

further on the back of ongoing geopolitical tensions, no positive surprises expected in Q2

results, and lack of major positive events on the local bourses. Fears of rise in the
interest rates in 2015 could also slow down the fresh fund inflows from FIIs and could
result in some outflows in near term. However, the moderation in flows could be
temporary (for a few months). If the government delivers on its promises and the
economy growth picks up pace, the FII flows could pick up again and remain healthy.
Strengthening USD a threat to
Indian currency & equity markets

Retail Research

The USD index, the gauge that measures the strength of the US currency against a basket
of major units, has bounced back near the new four-year high. Investors have now
realized that a rise in interest rate by US fed will create surplus demand for dollar and
other solid assets. In the past few months, US Dollar (DXY) index has strengthened around
~7% to 85.9 levels (as on Sept 30, 2014) since April 01, 2014. This has been primarily
because of the diverging trend in the US Federal Reserve vis--vis European Central Bank
(ECB). While the Fed is likely to move towards neutrality, the renewed risk of fading
recovery in the Euro zone (EZ) has forced ECB to move towards further easing.
Consequently, Euro has fallen 3.5% against USD. Japanese Yen has depreciated by 5.1%
vs. USD index. This trend is likely to be reinforced further, as the Feds move towards
neutrality becomes more apparent. Apart from developed market currencies, USD index
has also strengthened significantly against the many emerging market currencies like
Malaysian Ringgit (3.6%), Indonesian Rupiah (4.1%) & Brazilian Real (up 7.5%) in
September. However, Korean won and INR have shown great resilience as the
appreciation of USD index vs. these emerging currencies has not yet been sharp.
However, we feel, continued strengthening of USD index could result in more & steep
depreciation in INR in near term. While one may consider lower crude prices in response
to strong DXY to have salubrious influence on India CAD and INR, historical assessment
indicates that on net basis, INR actually weakens in response to stronger DXY. Further, if
interest rate tightens in US, it could result in more outflow of funds and rupee
depreciation, which could result in fall in the Indian equities.
Also it should be noted that historically, USD index and Nifty have inverse co-relation,
though with a time lag. However, over the last six months, the markets have exhibited
positive co-relation with USD index. This could be due to euphoric market reaction to the
new government at the Centre & expectations of turnaround in economy post that.
However, this trend could reverse going forward. If USD index continues to strengthen
over the next few months, the Indian markets could witness a reversal and could start
moving down.
20

Markets to consolidate / correct

in near term before the next
uptrend begins

Retail Research

Indian stock markets have been rallying sharply since March this year. While a large part
of the rally was seen as a euphoric market reaction to the new government at the
Centre, it appears that the fundamentals have played a role too in keeping the kept
market sentiments buoyant. The market is partly factoring Indias transition to an
economy with higher GDP growth in medium term and also, with lower cost of capital.
We believe that formation of BJP led government at the centre will meaningfully improve
'business confidence' and boost investment cycle, leading to higher GDP growth in FY16
onwards. However it may take two-three quarters more for the core sectors, including
capital goods and infrastructure to return to growth, assuming a pick-up in the Capex
cycle. For consumer sectors, demand is expected to pick up when festive season begins.
The average earnings growth has been close to 14% in the last four quarters (Q2FY14 to
Q1FY15) as against less than 5% in the four quarters preceding these (Q2FY13 to Q1FY14).
That shows sustained improvement in the growth trajectory. The earnings growth in the
domestic-demand driven sectors (non-export companies) also improved significantly to
around 12% in Q1FY15 which is way higher than the growth trend of low single digits in
the past ten quarters.
In light of the subdued earnings growth over the past couple of years, we believe the 1617% EPS growth forecast is achievable over the next couple of years. This is based on the
premise that inflation will subside, resulting in increase in real incomes, improved
21

investor confidence post the general election and global recovery. However, lower global
growth could play spoilsport.
Economic reforms are Indias only hope for higher GDP growth in the medium term. India
has limited fiscal or monetary options currently given its macroeconomic challenges.
Economic reforms can propel earnings in a few sectors in the short term and evidence of
fiscal consolidation and structural reforms may finally encourage the RBI to reduce policy
rates, which can lead to a re-rating of the market. We expect these events to play out
over the next 2-3 quarters.
While the medium to long term trend of the market remains bullish, the absence of any
fresh positive triggers on the local bourses in the near term, increasing geopolitical
tensions (like Ukraine Crisis, US-Syria, unrest in Hong Kong, etc) and fear of interest rate
hikes in US in the next few months could result in some consolidation / correction in the
Indian equity markets in the near term. We expect the BSE Sensex to trade in the range
of 25800-27300. Probability of the markets breaking above the higher range is less in the
month of October, unless there is a big positive trigger like upgrade of GDP estimates,
earnings upgrades or the geopolitical tensions ease drastically (looks unlikely in the near
term).

Technical Commentary:

Current Observation:
Daily Timeframe:

Retail Research

Nifty is currently showing recovery from the key support of 7840 levels and the volatility
stood higher during markets bounce back from the lows.
22

Weekly Timeframe:

Retail Research

The key event of RBIs mid quarter policy review triggered fresh intraday buying but Nifty
was not be able to break above the hurdles of around 8030.
The formation of minor negative sequence of lower tops and bottoms is on its way as per
daily timeframe and recently Nifty has formed a lower bottom around 7841-26th Sept. The
larger degree of higher tops and bottoms is still intact and Nifty is currently taking support
of intermediate trend line (green line, which is drawn from the low of 5984-14th Feb).
This suggests strength of uptrend as per larger timeframe and minor weakness as per smaller
timeframe. The strength of larger timeframe always has influence on the weakness of
smaller timeframe, hence one may expect Nifty to hold the lower levels support around 7850
levels for near term.
The daily momentum oscillator like RSI is placed near its lower bullish range around 40 levels
and daily positive swing indicator like -DMI is forming lower lows (as compared to previous
+DMI peak). This signals the recent decline of Nifty has not damaged the strength of
momentum oscillators and this could be viewed as positive for the underlying trend.

Nifty as per weekly timeframe is showing declines in the last three weeks, but the buying is
emerging from the lower levels.

23

The intermediate support of ascending trend line (brown line which is connected from the
lower levels of 5933-early Feb 14) is intact and Nifty is showing recovery from near that
trend line area.
Though Nifty has declined in the last three weeks after forming a high of around 8180 levels,
there is absence of the formation of important bearish top reversal pattern.
The support of ascending trend line as per weekly timeframe is likely to offer support for
falling swing of Nifty.
Weekly momentum oscillator like RSI is now placed around 66 levels. The key area of 60 has
been holding up nicely during previous higher bottom formations of Nifty and as long as
weekly RSI stays above 60 levels, there is a possibility of bounce back in RSI/Nifty as per
larger timeframe in near term.

Nifty Monthly timeframe

Monthly Timeframe

Retail Research

After a continuous up move in the last four months, Nifty is showing high wave type candle
pattern for the month of Sept, which is suggesting a tiring or breather type pattern. This
pattern could pause the underlying uptrend for the time being, but this could be viewed as a
top reversal pattern only when the Nifty moves below 7629.
During sharp uptrend (faster up moves), the formation of such type of candle patterns are
likely and it more often results in a pause of the underlying trend and the underlying
continuous its trend after a minor intra month consolidation or minor declines, before
resuming its main trend.
24

Summing Up

Monthly momentum oscillator like 14 month RSI has been consolidating around 76 levels.
From here, monthly RSI could decline down to 65-60 levels. This decline could have a minor
negative impact on the price of Nifty, but RSI could itself turn down sharply.
In the last 6-7 months, Nifty is continuously moving up and there is a possibility of the
formation of a new higher bottom by showing minor declines as per monthly timeframe
chart. This possible higher bottom process could attract buying interest from the lower
levels.
The detailed study of smaller to larger timeframe is signaling a larger degree of
consolidation for Nifty for the next one month. At the beginning of October month we could
possibly see a bounce back in Nifty up to the highs of 8065/8160 levels, before showing fresh
corrections from the highs.
Having formed a tiring type candlestick pattern in last month as per monthly chart, we are
likely to see decline in the market from the highs, but unlikely to see any down trend/sharp
declines as per larger degree unless the Nifty falls below 7629. At the same time there is a
possibility of emergence of strong buying interest from the lower levels.
The crucial lower levels supports for Nifty for the next one month is placed around 7629
levels (below 7850 levels) and any upside bounce is expected to halt around 8160-80 levels.
This suggests larger consolidation range is ahead for the market between 8200-7600 levels
over the next one month.

Learning Technical Analysis

Can the Retail Algorithmic
Trader compete with the large
Quant Funds

Retail Research

New algorithmic traders practising at the retail level may question whether it is still possible
to compete with the large institutional quant funds. Due to the nature of the institutional
regulatory environment, the organisational structure and a need to maintain investor
relations, funds suffer from certain disadvantages that do not affect the retail algorithmic
traders.
The capital and regulatory constraints imposed on funds lead to certain predictable
behaviours, which can be exploited by a retail trader. "Big money" moves the markets, and
as such one can dream up many strategies to take advantage of such movements.
Trading Advantages/disadvantages enjoyed by the retail algorithmic trader over many larger
funds are mentioned below.
Capacity - A retail trader has greater freedom to play in smaller markets. They can generate
significant returns in these spaces, even while institutional funds can't.
25

Retail Research

Crowding the trade - Funds suffer from "technology transfer", as staff turnover can be high.
Non-Disclosure Agreements and Non-Compete Agreements mitigate the issue, but it still
leads to many quant funds "chasing the same trade". Retail traders are not constrained to
follow the same strategies and so can remain uncorrelated to the larger funds.
Market impact - When playing in highly liquid, non-OTC markets, the low capital base of
retail accounts reduces market impact substantially.
Leverage - A large quant fund, depending upon their legal setup, is constrained by
margin/leverage regulations. Private investment funds do not suffer from the same
disadvantage, although they are equally constrained from a risk management perspective.
Risk Management - Retail Algo traders often take a different approach to risk management
than the larger quant funds. It is often advantageous to be "small and nimble" in the context
of risk.
Crucially, there is no risk management budget imposed on the retail trader beyond that
which they impose themselves, nor is there a compliance or risk management department
enforcing oversight. This allows the retail trader to deploy custom or preferred risk
modelling methodologies, without the need to follow "industry standards". However, this
flexibility can lead to retail traders to becoming "sloppy" with risk management.
Investor Relations - As the retail trader is independent, he need not concern himself with
outside investors who drive the larger quant funds. The outside investors drive all manner of
incentives for the larger fund - issues which the retail trader need not concern themselves
with.
Compensation structure - In the retail environment the trader is concerned only with
absolute return. Retail traders are also able to suffer more volatile equity curves since
nobody is watching their performance who might be capable of redeeming capital from their
fund.
Regulations and reporting - Beyond taxation there is little in the way of regulatory
reporting constraints for the retail trader. Further, there is no need to provide monthly
performance reports or "dress up" a portfolio prior to a client newsletter being sent. This is a
big time-saver.
Benchmark comparison - Funds are not only compared with their peers, but also "industry
benchmarks". For a long-only India equities fund, investors will want to see returns in excess
of the Sensex/Nifty. Retail traders are not enforced in the same way to compare their
strategies to a benchmark.

26

Performance fees - The downside to being a retail trader are the lack of management and
performance fees enjoyed by the successful quant funds.
Technology - One area where the retail trader is at a significant disadvantage is in the
choice of technology for the trading system. Using the best technology is expensive in terms
of time, capital or both. The retail trader must pay for this out of trading profits as there
are no management fees to cover expenses.
In conclusion, it can be seen that retail traders possess significant comparative advantages
over the larger quant funds. Potentially, there are many ways in which these advantages can
be exploited.

Derivatives Commentary:

Retail Research

The month of Sept 2014 saw the Nifty scaling new life highs to touch a high of 8180 before
sliding lower in the later part of the month. The Nifty lost 1.44% during the Sept series.
In the F&O space, the FIIs were net sellers in the Index Futures segment of Rs.3717 cr (vs net
buyers of Rs.1338 cr in August 2014) with flat open interest. In the index Options segment,
the FIIs were large net buyers of Rs.15705 cr (vs net buyers of Rs.11062 cr in Aug 2014),
which was accompanied with a rise in open interest. In the Stock Futures segment, FIIs were
large net sellers, while open interest fell over August.
The Oct 2014 series has started on a heavier note compared to the previous series. In terms
of value, the Oct 2014 series has begun with market wide OI at Rs.68,088crs. Vs.
27

Retail Research

Rs.66,400crs. at the beginning of the Sept 2014 series. It was Rs.64,100crs. at the beginning
of the Aug 2014 series. This increase in OI indicates that traders have become more
aggressive despite the recent correction in the markets.
Looking at the rollover data, we observe that Nifty rollover figures were marginally higher at
72% Vs. the three month average of 71%. Market wide rollover was at 79% which is in line
with its three month average.
The build up of short rollovers due to the decline in prices towards expiry and the absence
of any substantial rise in rollover suggests that sentiment has turned uncertain after the
Governments decision to defer gas price increase and the Supreme Courts verdict to scrap
coal blocks.
Sectorally, defensives like IT, Pharma and FMCG saw long rolls while Banking, Power, Metal
and select mid cap stocks saw short rollovers.
Coming to stock specific action, shorts rollovers were seen in SBI, Axis bank, ICICI Bank,
NMDC, Sesa Sterlite, Jindal Steel, Hindalco, Powergrid and Tata Power.
Reflecting the declining volatility expectations, the Nifty IV has dipped to 12.89% at the
start of the Oct series from 13.56% at the beginning of the Sept series. The Nifty OI PCR rose
to 0.85 at the start of the Oct series from 0.79 at the start of the Sept series. The rise in the
OI PCR indicates a greater buildup of puts in the market.
Technically, the Nifty is now in a short term downtrend after breaking the crucial supports
of 7925.
Index option activity is suggesting a trading range of 7800-8200 in the near term. This is
because the maximum Call OI is currently being seen in the 8100-8200 strikes indicating this
is the maximum expected upside for the Nifty in the near term. In the put segment,
maximum OI is currently being seen in the 7900-7800 puts, suggesting this is the maximum
risk on the downside for the near term.

28

Learning Derivatives Analysis

Call Ratio Backspread

Sell 1 ITM Call

Buy 2 OTM Calls

Retail Research

The call backspread (reverse call ratio spread) is a bullish strategy in options trading that
involves selling a number of call options and buying more call options of the same underlying
stock and expiration date at a higher strike price. It is an unlimited profit, limited risk
options trading strategy that is taken when the options trader thinks that the underlying
stock will experience significant upside movement in the near term.
When to use: Normally entered when market is near bottom and shows signs of increasing
activity, with greater probability to upside.
Profit:
Maximum Profit = Unlimited
Profit Achieved When Price of Underlying >= 2 x Strike Price of Long Call - Strike Price of
Short Call +/- Net Premium Paid/Received
Profit = Price of Underlying - Strike Price of Long Call - Max Loss
Loss:
Max Loss = Strike Price of Long Call - Strike Price of Short Call +/- Net Premium
Paid/Received + Commissions Paid
Max Loss Occurs When Strike Price of Long Call
Breakeven:
Upper Breakeven Point = Strike Price of Long Call + Points of Maximum Loss
Lower Breakeven Point = Strike Price of Short Call

29

Put Ratio Backspread

The put backspread (reverse put ratio spread) is a bearish strategy in options trading that
involves selling a number of put options and buying more put options of the same underlying
stock and expiration date at a lower strike price. It is an unlimited profit, limited risk
options trading strategy that is taken when the options trader thinks that the underlying
stock will experience significant downside movement in the near term.
When to use: Normally entered when market is near top and shows signs of increasing
activity, with greater probability to downside (for example, if last major move was up,
followed by stagnation).
Profit:
Maximum Profit = Unlimited
Profit Achieved When Price of Underlying < 2 x Strike Price of Long Put - Strike Price of Short
Put + Net Premium Received
Profit = Strike Price of Long Put - Price of Underlying - Max Loss
Loss:
Max Loss = Strike Price of Short Put - Strike Price of Long Put - Net Premium Received +
Commissions Paid
Max Loss Occurs When Price of Underlying = Strike Price of Long Put
Breakeven:
Upper Breakeven Point = Strike Price of Short Put
Lower Breakeven Point = Strike Price of Long Put - Points of Maximum Loss

Sell 1 ITM Put

Buy 2 OTM Puts

Retail Research

30

Extract of Calls during September 2014

Index Futures Calls
Trading Call

Entry at

Sloss

Targets

Exit Price
/ CMP

Exit Date

%
G/L

Comments

Time
Horizon

Avg.
Entry

Abs.
Gain/Loss

Nifty

8022.0

7985.0

8200.0

7985.0

25-Sep-14

-0.5

Stop Loss Triggered

1-5 Days

8022.0

-37

24-Sep-14

Short Nifty Oct Fut

8063.6

8100.0

7980.0

8016.2

24-Sep-14

0.6

Premature Profit Booked

1-5 days

8063.6

47.35

17-Sep-14

Nifty Future

7970.5

7939.0

8060.0

8060.0

18-Sep-14

1.1

Target Achieved

2-3 days

7970.5

89.5

12-Sep-14

Bank Nifty Sept Fut

16318.0

16245.0

16450.0

16245.0

15-Sep-14

-0.4

Stoploss Trigg.

2-3Days

16318.0

-73

10-Sep-14

Nifty Future

8107.3

8074.0

8160.0

8139.4

10-Sep-14

0.4

Premature Profit Booked

2-3 days

8107.3

32.1

4-Sep-14

Nifty Sept Fut

8110.0

8145.0

8050.0

8145.0

5-Sep-14

-0.4

Stop Loss Triggered

2-3Days

8110.0

-35

4-Sep-14

Nifty Sept Fut

8112.4

8157.0

8000.0

8096.7

4-Sep-14

0.2

Premature Profit Booked

1-5 days

8112.4

15.65

Comments

Time
Horizon

Avg.
Entry

Abs.
Gain/Loss

Premature Profit Booked

1-5 Days

10.3

4.25

Premature Exit

3-5 Days

9.6

-1.1

Premature Profit Booked

3-5 Days

7.35

3.2

Target Achieved

2-3 days

2.6

2.9

Date
25-Sep-14

B/S

Stock and Nifty Options Calls

Date

B/S

Trading Call

Entry at

Sloss

Targets

Exit Price
/ CMP

Exit Date

% G/L

30-Sep-14

Yes Bank 540 Put

10.3

6.9

22.0

14.6

30-Sep-14

41.3

26-Sep-14

SSLT 270 Put Oct

9.6

5.9

18.0

8.5

29-Sep-14

-11.5

23-Sep-14

Hindalco 160 Put Oct

7.4

3.9

14.0

10.6

24-Sep-14

43.5

19-Sep-14

Tata Global 170 Call

2.6

1.4

5.5

5.5

19-Sep-14

111.5

16-Sep-14

KTK Bank 125 Put Sept

1.8

0.9

3.5

2.8

16-Sep-14

60.0

Premature Profit Booked

3-5 Days

1.75

1.75

9-Sep-14

Bank of Baroda Sept 900 Calls

30.0

21.0

50.0

22.4

10-Sep-14

-25.3

Premature Exit

1-5 days

30

-7.6

4-Sep-14

Apollo Tyres 180 Put

5.1

2.8

10.0

3.9

4-Sep-14

-24.5

Exit

2-3 days

5.1

-1.25

1-Sep-14

Tata Motors 520 Put Sept

13.8

6.5

25.0

17.7

2-Sep-14

28.3

Premature Profit Booked

3-5 Days

13.8

3.9

Update of Trading BTST / STBT/ Future Calls

B/S

Trading Call

Entry at

Sloss

Targets

Exit Price
/ CMP

Exit Date

%
G/L

Comments

Time
Horizon

Avg.
Entry

Abs.
Gain/Loss

30-Sep-14

Colgate Palm

1694

1640

1750

1727.3

30-Sep-14

2.0

Premature Profit Booked

3-7 days

1694

33.25

29-Sep-14

Heliosmath

108, 113.85

106

126

121.5

29-Sep-14

6.7

Premature Profit Booked

2-3 days

113.85

7.65

25-Sep-14

Nuclues Software

235.95

226

255

226.0

26-Sep-14

-4.2

Stop Loss Triggered

2-3 days

235.95

-9.95

22-Sep-14

Sobha Developers

439.5

419.5

485

432.6

23-Sep-14

-1.6

Premature Exit

3-5Days

439.5

-6.95

19-Sep-14

Hubtown

125

117

138

132.5

19-Sep-14

6.0

Premature Profit Booked

3-5Days

125

7.5

18-Sep-14

Zee Learn

35.5, 37.2

34.45

42

39.8

18-Sep-14

7.0

Premature Profit Booked

2-3 days

37.2

2.6

12-Sep-14

Delta Corp

94, 95.55

92

105

92.0

16-Sep-14

-2.9

Stop Loss Triggered

2-3 days

94.75

-2.75

10-Sep-14

U Flex

161.95

157

172

166.4

11-Sep-14

2.7

Premature Profit Booked

2-3 days

161.95

4.45

Date

Retail Research

31

8-Sep-14

Siemens

865.55

825

940

901.5

9-Sep-14

4.1

Premature Profit Booked

3-5Days

865.55

5-Sep-14

Asian Paints

640.1

620

680

680.0

8-Sep-14

6.2

Target Achieved

4-Sep-14

Wabco India

3810

3700

4200

3931.6

4-Sep-14

3.2

Premature Profit Booked

2-Sep-14

IVRCL Infra

19.25

18.1

25

19.7

3-Sep-14

2.3

1-Sep-14

Seamec Ltd

146.5

139

170

152.8

1-Sep-14

4.3

Trading Call

Entry at

Sloss

Targets

Exit Price
/ CMP

Exit Date

35.9

5-10 days

640.1

39.9

3-7 days

3810

121.55

Premature Profit Booked

5-10 days

19.25

0.45

Premature Profit Booked

2-3 days

146.5

6.3

%
G/L

Comments

Time
Horizon

Avg.
Entry

Abs.
Gain/Loss

Positional Calls
Date

B/S

29-Sep-14

IBReal

74.4

70.9

82

70.9

30-Sep-14

-4.7

Stop Loss Triggered

5-7 Days

74.4

24-Sep-14

PNB Oct Fut.

945.25 - 965

995

840

878.5

25-Sep-14

7.6

Premature Profit Booked

2 Weeks

945.25

66.75

18-Sep-14

HCL Insys

78.8 - 76.5

74.5

90

85.7

19-Sep-14

8.7

Premature Profit Booked

2 - 3 Weeks

78.8

6.85

17-Sep-14

Manaapuram

28.5 - 27.5

26.3

35

31.3

18-Sep-14

9.6

Premature Profit Booked

3-14 days

28.5

2.75

9-Sep-14

Aries Agro

102 - 98

94

120

110.9

9-Sep-14

8.7

Premature Profit Booked

3-10 days

102

8.9

8-Sep-14

KPIT

159.8

150.5

182

165.3

11-Sep-14

3.4

Premature Profit Booked

1 Week

159.8

5.45

8-Sep-14

BF Utilities

645.95

600

750

676.4

16-Sep-14

4.7

Premature Profit Booked

5-10 days

645.95

30.45

8-Sep-14

All Cargo

256

240

320

241.0

15-Sep-14

-5.9

Exit Called

5-10 days

256

-15

2-Sep-14

GE Shipping

393

365

500

416.6

10-Sep-14

6.0

Premature Profit Booked

40-75 days

393

23.55

25-Aug-14

USHER Agro

43.5 - 41.5

40

55

50.0

10-Sep-14

14.9

Premature Profit Booked

3-10 days

43.5

6.5

25-Aug-14

HCC

39.3

36

46

42.1

3-Sep-14

7.1

Premature Profit Booked

5-10 days

39.3

2.8

22-Aug-14

Ktk Bank

129.5

122.5

145

132.9

5-Sep-14

2.6

Premature Profit Booked

5-10 days

129.5

3.4

Retail Research

32

Gainers & Losers September 2014

Top Gainers From F&O
Price

Top Losers From F&O

Price

Price

29-Aug-14 30-Sep-14 % chg

MRF

24030.95

32681.95 36.00

HEXAWARE

159.90

APOLLOTYRE

Price

Price

29-Aug-14 30-Sep-14 % chg

46.50

26.45 -43.12

JKTYRE

201.15 25.80

GMRINFRA

25.35

17.55 -30.77

165.30

203.75 23.26

JINDALSTEL

233.00

172.80 -25.84

EICHERMOT

9755.95

11972.00 22.71

IDBI

75.95

60.85 -19.88

TVSMOTOR

186.50

227.95 22.23

BHEL

240.90

200.45 -16.79

CIPLA

514.20

626.80 21.90

BANKINDIA

277.45

AUROPHARMA

817.55

968.25 18.43

RELINFRA

699.30

1564.75

1800.35 15.06

DLF

273.70

314.15 14.78

RCOM

1536.10

1742.55 13.44

ZEEL
COLPAL

SAIL

Price

Price

29-Aug-14 30-Sep-14 % chg

JPASSOCIAT

DIVISLAB

Top Losers From CNX 500

Top Gainers From CNX 500

Price

29-Aug-14 30-Sep-14 % chg

276.45

489.20 76.96

JPASSOCIAT

46.50

26.45 -43.12

GSFC

67.50

114.55 69.70

USHAMART

40.30

23.30 -42.18

NBCC

422.40

688.40 62.97

SUZLON

21.55

12.90 -40.14

MASTEK

190.30

291.35 53.10

MONNETISPA

113.10

77.60 -31.39

HFCL

13.40

19.90 48.51

GMRINFRA

25.35

17.55 -30.77

232.00 -16.38

MANGCHEFER

68.75

98.10 42.69

BALRAMCHIN

585.45 -16.28

IBPOW

9.05

12.90 42.54

IMFA

177.30

150.85 -14.92

SUNDARMFIN

934.50

1304.80 39.63

116.00

99.00 -14.66

ZENSARTECH

444.30

81.05

69.60 -14.13

WELSPUNIND

217.80

71.95

50.00 -30.51

353.95

249.95 -29.38

JPINFRATEC

31.60

22.55 -28.64

615.85 38.61

JINDALSTEL

233.00

172.80 -25.84

300.20 37.83

GVKPIL

13.65

10.15 -25.64

RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office
HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves,
Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Website: www.hdfcsec.com
Email: hdfcsecretailresearch@hdfcsec.com
Disclaimer: This document has been prepared by HDFC securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made
available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent
that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time
solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for non-Institutional Clients only.

Retail Research

33