Nifty’s inability to cross key levels like 10500-10600 zones confirms the view of advantage bears from a medium-term perspective, says JK Jain, head of equity research at Karvy Stock Broking.
Rather than being sector specific, one must choose quality stocks from different sectors in this decline from lifetime highs, JK Jain, head of equity research at Karvy Stock Broking, said in an interview to Moneycontrol's Kshitij Anand.
Q) The year FY18 pared most of the gains thanks to steep correction seen in the month of February and March. How is FY19 likely to pan out for investors – will it be a year which belongs to the bulls or bears will keep gains in check?
A) Year to date our markets have corrected more than 5 percent, while from the all-time highs zone of 11171, we have completed 10 percent type of correction.
Since Jan 2017, it is the first time that we have seen Nifty correcting towards the 200-days moving averages (DMA), while the underperformance of our markets with respect to global peers can be attributed to the relentless selling by foreign players in both cash and derivatives markets on the weakening of domestic macros.
On the technical front, Nifty’s inability to cross key levels like 10500-10600 zones confirms the view of advantage bears from a medium-term perspective.
Prolonged sustenance below all major short-term moving averages also confirms that bears are likely to have upper hand in the first two-quarters of FY 19.
Crude hovering around USD 70 per dollar, a spike in global bond yields, and the uncertainty on the BJP’s strong majority in 2019 elections may make us less attractive on the global space for the next financial year.
Participants are concerned over the ruling party’s defeat in recent by-polls in UP and Bihar and the no-confidence motions moved by the TDP and the YSR Congress.
Almost 80 seats out of 543 are from UP and any expectations in a dip in seat count in 2019 may trigger more volatility into markets.
If the SP and the BSP come together, it could significantly hurt a number of seats BJP can win. And, on the other side, the upcoming elections in Karnataka may be seen as key point by most analysts.
High volatility for 2018 being the new norm and going forward for FY19 we expect the Nifty to be very volatile and move in a band of around 20 percent and is more likely to stay in a broad range of 8900-9100 on the downside to 11000-11200 on the upside.
Q) What is your index target for the financial year 2019? Do you think the index will be able to reclaim 12000 on Nifty and Sensex could rise above its previous record high of 36443?
A) The long-term rally is likely to gather some steam only if the heat around the ongoing trade war between the US and China cools down a little. A trade war is likely to end up diffusing the importance and existence of WTO.
Apart from this, usually trade wars have the tendency to mostly end up in a situation giving rise to a probable currency war.
Lastly, the biggest worry right now is that there is a clear impact of all this on the price of commodity stocks which have taken a lot of beating already.
If this trade war continues for long, it will eventually set off a slowdown among industries in growing economies and will also reduce the overall output.
Technically, considering the chart setup of the Nifty, short-term corrections and fizzling out of rallies are a part and parcel of the stock markets.
We have already seen indices correct by about 10 percent or so in the recent past, post the Union Budget, the outcome of the FOMC meet and from the ongoing Trade War fears.
If the Nifty index manages to take support around 9700-9800 and if it also successfully sustains above the 200 DEMA, thereby holding above the psychological 10k mark, then we expect some relief rally towards 10450-10500 to come in.
Thus, we would look to buy the declines towards the mentioned support base and remain cautiously bullish until there is a substantial fall below the said levels.
The index retesting the new highs would be a difficult task in this calendar years, only support the index could get would be micros (the earnings surprise) in the coming quarters.
Q) Any top five stocks which you think are ideal wealth-creating ideas which investors can look at buying in the coming FY for a period of 2-3 years?
A) Here is a list of top 4 stocks which could be ideal for wealth generation in the next 2-3 years:
Aurobindo Pharma has been under tremendous selling pressure from the past few months owing to the overall bearish trend in the entire pharmaceuticals space.
The shorter-term chart structure of the stock indicates the formation of lower tops and lower bottoms. However, the longer term chart patterns indicate that the stock is consolidating in a wide range between Rs.500 - Rs.800 on weekly charts and is currently hovering around the lower end of the said trading band.
The stock has immediate supports pegged around Rs.520 - Rs.500 below which the next meaningful support zone for the stock lies around Rs.480 - Rs.470.
Whereas on the upside, the stock has its immediate supply zone around Rs.630 - Rs.650 crossing which a surge towards a potential upside target zone around Rs.780 - Rs.800 levels may also be seen in the counter.
Technical parameters like the RSI and ADX do not indicate a rosy picture for the stock at the current juncture. However, things may get better for the market leader in Semi-Synthetic Penicillins, if it manages to hold and sustain above the immediate support levels as mentioned above.
The monthly chart structure of the stock suggests the formation of cycles of higher highs and higher lows, which clearly indicates that the long-term chart structure is still bullish and the current decline in the price of the stock is a normal technical correction.
In the past, it has also been observed that every time the stock has made a cycle of higher low preceded by a higher high, it has always seen value buying from such levels, which gives investors with a longer-term horizon a brilliant break to go long in the counter at current levels with a stop loss placed below Rs. 430, for the aforesaid target levels in about a year’s time.
Bharti Airtel Ltd is an Indian global telecommunications services company based in New Delhi, India. It operates in 16 countries across South Asia and Africa.
Airtel provides GSM, 3G, 4G LTE and VoLTE mobile services, fixed line broadband and voice services depending upon the country of operation.
It is the largest mobile network operator in India and the third largest in the world with over 386 million subscribers. Airtel was named India's second most valuable brand in the first ever Brandz ranking by Millward Brown and WPP Plc.
Technically, Bharti Airtel was in a secular uptrend since 2003 forming higher highs and higher lows as seen on the monthly charts. However, from 2007 the stock is strictly trading in a range of 276 to 564 levels and is holding the same.
The 55-day CCI is in the monthly chart is trading above the zero levels indicating that the stock is poised to trade with a positive bias. Similarly, the MACD (12, 26, 9) is in the monthly charts are plotting above zero line indicating the bullishness in the stock.
Even the Parabolic SAR (Stop and Reverse) is placed below the price indicating buying in the counter is still intact from a long-term perspective.
On the momentum setup 14-period weekly RSI managed to sustain above 40-levels during recent price correction, which indicates that bulls are in control and price correction in the stock is being utilized as a buying opportunity by long-term investors in the counter.
In the current scenario, considering all the data mentioned above, one may go long in the counter on dips towards the mentioned floor support zone for an immediate upside target towards the said range ceiling levels, breaching which the stock might move towards its all-time highs in the long-term perspective.
UPL:
The stock has been in an uptrend since 354.88 levels made in February 2016 and rallied to its recent high of 902.50 levels registered in the month of July 2017 a whopping gain of 153.60 percent in a span of around one and half year.
Thereafter, the stock went into correction mode and corrected lower towards 684 levels initially clocked in the month of December 2017 and rallied again to make a lower low at 828.50 levels which were registered in the month of January 2018.
Thereafter, the stock again went into correction mode and traded lower towards 672.50 levels cloaked in the month of February 2018.
The correction from the highs of 900 levels to the low of 672.50 levels is just around 33.84 percent from the top which is a normal correction in any bull market.
The price high at 902.50 made a full square of 30(30*30=900), which indicates that stock is respecting Gann Square of Nine principle, which was again reaffirmed by the stock in recent price correction, where stock made a swing low near 672.50 which happens to be another Gann square out number of 26 (26*26=676), and noticeably it has also completed 720 degrees circle correction, which depicts power of Gann square of nine.
On the price chart, the stock is trading in the sideways range of 672.50-828.50 levels from past 11weeks indicating sideways corrective phase in a larger bull market.
The stock is flirting with its 200-day Exponential moving average which is currently placed around 754 levels; with the stock currently trading below it by around 12%.
On the weekly chart, the stock appears to be finding support near its weekly lower Bollinger band (20, 2, S) which is currently placed around 680.50 levels. Also on the monthly charts, the monthly mean of monthly Bollinger band (20, 2, S) is placed around 745 levels.
The 14 period RSI on the weekly chart is currently pegged at sub 41.86 levels, indicating the stock is in bull market range. On the quarterly and monthly charts, prices are above its quarterly and monthly parabolic SAR indicating long-term uptrend intact in the counter.
Technical support for the stock is placed around 660-665 levels followed by 580-600 levels while resistances are placed at 760-770 levels followed by 820-830 levels.
On the monthly charts, the stock is in the cycle of making higher high and higher low which suggest bullish bias on the stock from a medium to long-term perspective.
The stock after facing a resistance placed around 650 levels have witnessed selling pressure on the charts and has fallen to the levels of 440 levels which is a 30% fall from the higher levels and is a decent correction for the stock, which makes the stock a good one to buy at current levels.
The stock started its upward journey after giving a breakout from 29.06 levels in 2013 since then the stock has been given a stellar rally. On the monthly charts, the stock is trading above all the long-term moving averages which suggest that the stock has some inherent strength in it.
From the short-term perspective on the daily charts, the stock has once again tested the consolidation zone, from which the stock had started rallying, the zone had a range of around 40 points from 437-477 levels.
Now, any breakout from the said range might lead to some rally towards 505 levels and the next resistance is placed around 517 levels.
If we see the downside, then the stock has a support placed around 418 levels and the next support is placed around 397 levels which would be a good level to accumulate the stock from a medium-term perspective.
The volumes on the charts from the past several months have not seen a significant upsurge. Currently, the 14-day RSI is trading below the 9-DEMA which suggest that the downward trend is likely to continue, but if the stock is able to breach 520-550 levels in the medium term then one might see the scenario changing.
On the weekly charts, if we see the trend of the past 3-week fall in the stock then the previous trading week managed to close above the levels of 439 with a decent amount of volume on the charts.
During the previous trading week, it also tried to move upwards above 480 levels which it failed to do so. From a medium-term perspective, the support is placed around 366 levels below which the stock might test 300 levels, on the higher side if we see the stock has a resistance placed around 550 levels above which the stock might test 650 levels.
Q) Which sectors are likely to hog the limelight in the coming financial year and why?
A) Rather than being sector specific, one must choose quality stocks from different sectors in this decline from lifetime highs.
Stocks which we like include names like State Bank of India, Aurobindo Pharma Ltd, Hindalco Industries Ltd, Tata Steel Ltd, Tata Motors Ltd, Bharti Airtel Ltd, Indian Oil Corp Ltd, UPL Ltd, Adani Ports & Special Economic Zone Ltd, India bulls housing finance.
While on the sectors front, we expect IT and PHARMA sectors to perform better than the rest in the year 2018.
The midcap and large-cap IT companies able to adapt to the new age digital technologies and are also strengthening in the automation segments which could make the space as one of the strong sectors for the year 2018.
Even the tail wind of weakness in rupee against the dollar over last few weeks is also likely to add to their top line numbers. Hence, select large-cap and midcap IT stocks have much more potential to outperform in the coming quarters.
With the pace of US FDA clearing the issues and selective Pharma companies who managed to survive in the recent turmoil may also perform significantly for the current year.
Most of the management of the consumer goods, and discretionary companies have given a positive outlook for near-term and consumption as a theme may be looked by participants for the coming months.
The shift from unorganized to organize has picked momentum and we are able to see in the numbers also. So overall, export-oriented amid domestic consumers could see good growth in the current years. IT and Pharma stock which underperformed in the last 2-3 years could witness value buying in the markets.
Q) Do you see Modi 2.0 as we inch closer to national elections in the year 2019?
A) After BJP's lackluster performance in Gujarat and the party's humiliating defeat in Bihar and UP by-polls, there have been many interpretations of the performance of the BJP led NDA in 2019 general elections.
But as of now, we expect the current government may get the second term in 2019 though may not be with the full majority as after all the central government has some remarkable achievements in the field of economy, foreign policy, technology and infrastructure to its credit.
Even now, there seems to be an absence of a credible leader who can replace Narendra Modi as a global leader.
The government has so far had a clean-image with an average middle-class voter seeing PM Modi as a man with a progressive vision and clean intentions who has the potential and the desire to give effective, business-friendly and efficient governance.
Q) Mid and Smallcaps which hogged the limelight in FY18, do you think the trend will continue in the next financial year? If yes, why?
A) Since mid-Jan, both the BSE mid and the smallcap index or stocks have seen a sharp cuts of more than 12 percent YTD, while even after those cuts we believe still some mid and smallcap companies are trading at a slight higher valuations, with the expectation of the ongoing correction on major indices is likely to continue for near term.
We expect these stocks to come towards their average valuations levels and that zone, one may start accumulating the fundamentally strong stocks.
Even on charts also, most of those stocks may dip towards long-term support zones, which can be utilized to add to the long-term portfolio. Hence participants with deep pockets may look to deploy cash into those stocks which have delivered decent numbers in the recent quarters.
Q) There is a big hue and cry about crude. Do you think that the black gold could trade above $75-80/bbl?
A) The oil prices were boosted mainly by an unexpected drop in US oil inventories driven by lower imports, and higher refinery runs and demand. Adding to the record, Saudi energy minister declared that production cuts will continue in 2019 with a new cooperation platform and rising tension with Iran also contributed to the upside.
The basic argument for the ongoing surge is the fundamentals getting improved and the supporting factors were much stronger than the downside ones.
We expect the Oil prices trade in the broad range of $62-70/bbl and prices to remain highly vulnerable to the global developments.
On the domestic front, higher oil prices could impact the profit margins of companies across sectors such as refining, airline, paints, tyres, footwear, lubricants, cement, logistics, construction materials and chemicals for whom crude or its derivatives are major inputs/costs. Also, for Indian, the macros could get affected with higher oil price which could spike inflation as well.
Q) What should be the portfolio composition of investors in the coming financial year assuming he is in the age bracket of 35-40 years?
A) On a broader portfolio basis, for a person in the age bracket of 35-40 years, the exposure to direct equity should also ideally be around 50-60% while the rest could be spread across other avenues of investments.
A mixture of flagship mutual funds schemes from different segments like LARGECAP, MIDCAP, BALANCED and MULTICAP funds, which have delivered in the past must be a part of one’s portfolio.
Not neglecting the fixed income part, one must allocate a sufficient amount of money to this part of the overall portfolio, depending on one’s financial goals and his risk capacity and ability.
With the recent correction in the market one must increase the exposure towards equity market and at-least 60% of the money must be allocated to equity. One must have major exposure in large cap stocks and should be selective in mid-cap and small-cap stocks.
One can also allocate the money in the debt-funds which have seen significant underperformance in the last years and bond yields have factored in the most of the negatives, so debt funds can give better returns for the calendar year 2018.
Q) Do you think earnings is likely to bounce back in double digits in FY19?
A) We expect the earnings to make a strong bounce back after two bad years mainly to due to the implementation of structural reforms like Demonetization and GST.
The last quarter earnings wise better than street expectations, thus we believe the momentum to continue in the coming quarters as wells. With low base double digits earnings must not be a difficult task and could even surprise towards high teens growth as well.
Q) Some analyst was telling in an interview that India is now part of Expensive 4 in terms of valuations. Do you agree with the statement? Do you FIIs flows coming down in light of constant rate hikes by the US Fed and rising US bond yields?
A) Though the US Fed Rate hike was in-line with most participants’ expectations and the US Fed signalling two more hikes for CY18 and two in CY19 might not hurt much of the FII flows from India.
The valuations of the Indian equities became were expensive prior to the Union budget on expectations of pro-economy reforms. At the current juncture, markets are trading in a comfortable zone after correcting sharply from the peaks post facing jitters of LTCG, PNB fraud and ongoing escalations at the global levels.
We expect the fundamentals to improve on the back of improving macroeconomic factors with a consumption-led recovery, followed by public sector capex and improvement in external demand.
Our market has remained expensive over other emerging market for last 2 decades. Recently, our markets premiums have stretched to 90% over MSCI emerging markets.
However, in the recent underperformance, the premium valuations have narrowed and moved towards historical averages. Historically, our markets trade at average 40 percent premium to other emerging markets.