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Volatility may heighten ahead of derivatives expiry

Market men will eye the extent of rollover to December 2006 contracts from November contracts ahead of expiry of November contracts this Thursday (30 November). Derivatives positions are quite large. On 22 November, the open interest in NSE’s futures & options segment hit an all-time high of Rs 57,158 crore. The previous record high was Rs 56,991 crore of 27 April 2006. 46% of the open positions are stock futures and 22% are index-based futures.

Meanwhile, large daily FII figures indicate that there have been simultaneous entries and exits. This in turn indicates of different strategies being adopted by various FIIs operating in India. This also suggests churning of portfolios.

On a net basis, there has been stepping up of inflow by FIIs over the past two months. Their inflow totaled Rs 8378.20 crore in November 2006 (till 23 November). The inflow was Rs 8013 crore in October 2006. The inflow was Rs 1145 crore in July, Rs 4643.10 crore in August and Rs 5425 crore in September. The cumulative inflow for calendar 2006 has totaled $8.5 billion. The inflow was a record $10.7 billion 2005.

In the near term, the market would take cue from as to what extent the ruling government is able to pass some of the financial sector reforms. The winter session will debate, among other things, the Banking Regulation (Amendment) Bill, which proposes to increase the voting rights of foreign stakeholders in private banks presently capped at 10%. However, the Left parties are opposed to the amendment fearing that it will lead to a takeover of private banks by foreign entities. The winter session has just begun, and will last till 19 December 2006.

Asian markets were mixed on Monday. Key benchmark indices in Japan, Singapore and Taiwan were up by between 0.4% to 0.8%. Key benchmark indices in Hong Kong and South Korea were down by between 0.2% to 0.5%.

Oil eased back on Monday from gains made late last week. NYMEX crude for January delivery was at $59.55 a barrel, down from $59.90 at the end of an electronic-only trading session on Friday, and London Brent crude fell 29 cents to $59.74.

Market may remain firm on strong FII inflow

The market sentiment holds firm due to strong FII inflow and robust Q2 results. Firm Asian markets and cheaper oil price may boost domestic bourses further today. Strong FII inflow and revision in earnings estimates by brokerages for companies following strong Q2 results has fuelled renewed surge on the bourses - Sensex has gained 261.51 points in the past two trading sessions to a lifetime closing high of 13,399 on Monday (13 November).

Asian markets edged higher on Tuesday (14 November). Key benchmark indices in Hong Kong, Japan, South Korea, Singapore and Taiwan were up by between 0.2% to 1.6%.

US stocks advanced on Monday as investors bet that falling crude oil prices would support corporate earnings growth, pushing up shares of industrial bellwethers such as General Electric Co. But nervousness about this week's inflation reports, which could determine the course of interest rates, curbed a broader market advance. The Dow Jones industrial average rose 23.45 points, or 0.19 percent, to close at 12,131.88. The Standard & Poor's 500 Index edged up 3.52 points, or 0.25 percent, to finish at 1,384.42. The Nasdaq Composite Index ended up 16.66 points, or 0.70 percent, at 2,406.38.

US crude oil for December delivery extended Friday's 2.6 percent drop on expectations that mild US Northeast weather would slow heating demand. It ended down $1.01 at $58.58 a barrel on the New York Mercantile Exchange on Monday.

With expectations that the momentum of earnings growth would be sustained, FIIs have stepped up buying of Indian equities. Strong global liquidity has aided the surge in inflows. Buying is happening from new FIIs entering the Indian markets. By the first few days of November 2006, FII inflow has reached Rs 2816 crore (till 10 November). In the month of October 2006, when the earnings poured in, their net inflow totaled Rs 8013 crore compared to an inflow of Rs 4643 crore in August and Rs 5428 crore in September. FII-inflow in calendar 2006 so far has reached $7.3 billion. In calendar 2005, FII inflow was a record $ 10.7 billion.

A section of the market attributes the solid surge on the Indian bourses to increasing recognition of India’s long-term growth prospects. From 4,644 on 23 June 2004, it has galloped 188.5% in less than two and a half years.

The open interest in the derivatives segment is on the rise and it may trigger short-term volatility on the bourses.

Action may continue

After gaining over 169 points in the last four trading session, the market may show more exuberance and advance further on the back of bullish sentiment amongst investors. Yesterday, the Sensex closed at 13187 amid buying in several heavyweight and sectoral stocks. Also the positive opening in the Asian indices like Nikkei, Kospi and Jakarta coupled with overnight gains in US & European indices may help the market to move in positive territory. On the technical side, the Nifty could test upper levels at 3820 and 3860 should find support in the 3780-3727 range, while the Sensex may face resistance at 13258 and test lower levels at 13020.

US indices registered decent gains on on Monday with the Dow Jones gaining 120 points at 12106 and the Nasdaq ending 35 points higher at 2366.

Baring MTNL all the Indian ADRs ended on a positive note on the US bourses. Patni was the leading from the front with gains of over 3%. Rediff, Infosys, HDFC Bank, ICICI Bank, and Dr Reddy's gained over 1% each while Satyam, Wipro and Tata Motors ended with marginal gains. However, VSNL ended with marginal losses.

Crude oil prices in the US market ended on positive note, with the Nymex Light Crude oil for December delivery gaining $0.88 to close at $60.02 a barrel and the London Brent crude adding $1.28 to close at $59.15 per barrel. However, in the commodity space, the Comex gold for December series declined $1.30 to settle at $627.90 an ounce.

On Nov 03 2006, FIIs were net buyers of stocks to the tune of Rs227.40 crore (purchases worth Rs1,683.10 crore and sales of Rs1,455.70 crore) while domestic mutual funds were net buyers of stocks to the tune of Rs77.65 crore (purchases worth Rs525.32 crore and sales of Rs447.67 crore).

Major supports the rally with unexciting global cues

Indices managed to end in green as the index heavyweights propelled the market. Global cues were nothing much to favor as Asian indices ended mixed while Europe started off in ranged but trading in green. Among sectors, Aluminium, Cement and select FMCG stocks were the one which fuelled the days rally. But this rally was off set by selling in Auto, Banking and IT. Midcaps and Small caps too supported the rally. Index majors Reliance, industry, ACC fuelled the rally. Adding to this were the IT midcap which also supported the momentum with 3i infotech, Hexaware, Mphasis BFl trading high.

Crude traded at $58 which was good for the Energy stocks but OPEC is contemplating another cut in production in December in view of a decline in crude oil prices which could spurt crude prices to jump keeping energy stocks to trade weak. Index IT stocks too traded weak on the back of weak Dollar which is trading at Rs 44.89.

Sensex ended up by 56 points at 13186.89. It was helped up by gains in HLL (246.8,+5 percent), Guj Ambuja (128.15,+4 percent), HDFC (1526.55,+3 percent), Cipla (263.35,+3 percent) and TISCO (506.05,+3 percent). Restricting the gains were ONGC (859.8,-2 percent), Maruti (954.95,-2 percent), Bajaj Auto (2795.1499,-2 percent), SBI (1109.3,-2 percent) and Satyam (421.6,-1 percent).


Cement stocks were the once which zoomed with ACC, GUJ Ambuja, Grasim and many other small and midcap cement stocks rallied for the day. As we have positive view here because of good demand for cement in Infrastructural development which has been at full swing in the country and many SEZ's, Residential, Commercial and many more construction programs to keep cement manufactures busy.

Banking stocks were sluggish for the day on the back of news that FM will review the performance of PSU banks on various parameters like lending to the priority, agriculture & SME sectors and the first-half results. Heads of all the 17 nationalised banks, SBI and associates and IDBI attended the review meeting, besides representatives from the Reserve Bank, Indian Banks' Association and Nabard. Credit flow to agriculture, SMEs and the financial performance in the first half are the main issues to be discussed during the meeting. The Outcome came out to be that Finance Minister P Chidambaram has asked public sector banks to take a re-look at deposits and rebalance their portfolios. PC said that while the rate of credit growth in the economy was 'brisk', it was higher than sustainable levels. He said that meeting the demand for credit was a difficult challenge, and has asked the Indian Banks' Association (IBA) to suggest policy steps for growing deposits. The finance minister said that while banks must moderate credit growth to overheated sectors, productive sectors must not be denied credit. We really don't see much upsides in banks for now unless the consolidation story starts. Inflation is headed higher and a rate hike is pending. Look to take profits from this segment for now as inflation is the worry.

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Volatility kept market away from 13000!

Sensex opened with a gap up and soon spurted to a new all-time intra-day high of 12,994. Markets are hovering at its all time high and certainly this is driven by huge liquidity flow. It seems that FIIs interest is back to market. Rupee has seen appreciation and currently trading at around 42.21. Indian economy is good going and we believe that rupee will see more strength in long run. Coming back to market, after a three-days Bull run it was the Bear which took over due to caution trading and heavy profit bookings. Market was weak and ranged. Weak global cues also added weight to the indicies. Stocks from cement, energy, FMCG, power and telecom sectors were the key losers while selective stocks in aluminium, auto, software and steel held the ground.

Sensex closed down by 44 points at 12883.83. Losses were seen in HDFC Bk (1009.1,-4 percent), HLL (231.8,-2 percent), NTPC (128.35,-2 percent), HDFC (1514.65,-2 percent) and Grasim (2624.3501,-2 percent). Losses were restricted by gains in Satyam (450.45,+3 percent), BHEL (2462.55,+2 percent), Hero Honda (757.95,+2 percent), ICICI Bk (727.05,+1 percent) and TISCO (515.7,+1 percent).

Gateway To Growth

Patrick Mange is a doctorate in Economics from Germany. During his Ph.D days he floated a company with a few university friends. Years later he sold his shares in the company and joined Deutsche Bank in Frankfurt before moving to Paris. In the beginning, he was in bond research. Afterwards, he worked for Merrill Lynch and subsequently moved to BNP Paribas as head of strategy and research. He was recently in India after BNP Paribas took a 49.9 per cent stake in Sundaram AMC. Excerpts from an interview:

What is your view on global markets? The markets across the board have fallen and now there are worries like the middle-east crisis. So where do you see the global markets heading?
That is a hundred million dollar question! We are again in a transition phase in terms of monetary policies, economic growth and profit growth, at least in the US, which remains the benchmark and thus in focus as regards global equities. Such phases are characterised by low visibility and thus high volatility, which generally last for some time. We believe that markets, equities as well as bonds, are going to be quite choppy through the summer months if not a bit longer. But we are also convinced that equities will do well in the medium run, once investors recognise that we are not facing a hard landing and that profits growth is unlikely to collapse. We are still positive on equities but have progressively reduced the risk of our portfolio since the start of the year to take on jittery times ahead. We have also come back to close to neutral on government bonds. They are still expensive, but we think that yields are not likely to increase much from here.

There are certain exogenous factors — things related to geo-political events for example — that also have to be taken into account. If the middle-east crisis spreads, then we will have some more worries in the markets, as the likelihood of a faster downturn would meaningfully increase. But we don’t expect this to happen. I believe that geo-political risk premium will remain in the markets for the next few years. But its importance in the eyes of investors will be variable as in the past. Among the global markets, we are overweight on the US after a long time. This means that we are automatically a bit more defensive since the US has a lower beta to the MSCI World. We are tactically underweight on Japan, a bet which was difficult to take because we are still positive on Japan in economic terms. But we are more positive on some other countries as regards cyclical positioning of the economy.

Among the emerging markets, we are currently underweight on India. But here again it is an alpha story not a beta story. We believe that there are some other markets in the rest of the emerging world, which are likely to outperform now.

We are tactically underweight on China too, despite strong economic growth. Growth is not everything. You make profits with volume, or you make profits with margins. And I believe that making profits with margins is better. And therefore, we would not bet upon China yet. But we would now start to bet upon South Korea, a market that has been strongly sold lately, and to some extent Taiwan. The tech news is getting in such a negative territory that it’s difficult to believe it can get bad further. The rest of Asia is more or less neutral or underweight. We are overweight on the high beta Latin American markets. Markets like Chile, Brazil and Mexico are the ones we are looking at more closely. These markets also play the role of a commodity proxy or hedge. Thanks to commodity revenues, they have built up huge financial reserves and hence, look sheltered against any deep financial crisis. Generally we remain strategically bullish on emerging markets, which undoubtedly are in a much better shape from a structural point of view. They are the markets of today, not yesterday.

Earnings Upgrade required

* In our last Market Outlook report dated August 02, 2006, we had said that going ahead there would be two key positive triggers for the Indian equity market, viz a pause in the rate hikes by the US Federal Reserve (Fed) and better-than-expected earnings for Q1FY2007.

*The two triggers have played out as per our expectations and at the current level of 12,404 the Sensex has swiftly discounted both these positives, leaving very marginal upside.

* The Fed futures are indicating that any rate cut by the Fed can come in the first quarter of CY2007 at the earliest. This leaves us exposed to global economic risks in the interim six months.

* Corporate earnings haven't seen any significant upgrades over the last few months. Any upside from hereon would depend on the upgrades in the index' earnings driven by the better-than-expected Q2FY2007 earnings, especially in the banking and oil sectors.

*However, upgrades in the Sensex' earnings will have to be significant—in the range of 10%—to bring the market's valuations back to attractive levels. The Sensex is currently trading at 16.1x its one-year forward earnings, which is towards the higher end of the band in which it has usually traded, ie 12-16x.

* We continue to prefer domestic demand-driven stories like automobiles, banking, capital goods and cement.

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