Industry Update : May 2019

In May, Nifty was volatile and made a high-low of 12,041–11,281, and advanced 1.5%. On May 8, the market status was downgraded to an Uptrend Under Pressure. Markets progressed well after the exit poll numbers were out and final results, which gave the mandate for a stable government. On May 27, Nifty reclaimed its previous rally high of 11,857 and market status was upgraded to a Confirmed Uptrend. FIIs/FPIs were net sellers in May (Rs 2,200 crore) for the first time in 2019 on a monthly basis, while the net purchase from DIIs was more than Rs 5,000 crore.

Of the 48 developed and emerging markets we track, at the end of April, 34 were in a Confirmed Uptrend and none of them were in a Downtrend. But by May end, only nine were in a Confirmed Uptrend and 17 in a Downtrend, indicating weakness in global markets. Continue reading “Industry Update : May 2019”

Scenario Analysis on How Markets Could Behave After Election Results and How to Approach the Market Through the O’Neil Lens

Market Preview

At 8:00 a.m. IST, the SGX Nifty Futures was 2.3% higher at 11,694, compared with its previous close. It is at a premium to the Nifty’s previous closing of 11,407.

On an MTD basis, FIIs/FPIs sold stocks worth ~Rs 10,000 crore, while DIIs bought stocks worth ~Rs 9,000 crore.

Market status: Uptrend Under Pressure

Global stock markets:  Nikkei +0.2%, Kospi +0.4%, Hang Seng -0.8%, NASDAQ -1.0%, Dow 30 -0.4%, S&P 500 -0.6%.

How markets could behave after election results:

The average of exit polls predicts 300+ seats for the NDA.  The lowest and highest seats for the NDA in exit polls were 284 and 340 respectively. However, calling the election is tough. The final outcome on May 23 can be unpredictable. We look at the various scenarios that, in our view, might play out this week.

1) If the largest party wins 300+ seats on its own, it will reflect the strong confidence in the current government and there will be stability for the next five years. The Nifty could move 5-10% in a couple of weeks following the results.

2) If the largest wins around 250 seats, the market will likely be stable in the +/-3% range in the near-term.

3) Markets can be volatile if the largest party wins around 200 seats, as there will be uncertainty in a coalition government. Markets can take this negatively and correct 5-10% in the week.

How to approach the market through the O’Neil lens

According to William O’Neil’s strategy, rather than relying on esoteric systems for timing, let the market itself be your guide. That means closely following daily and weekly price and volume cues and watching for leading stocks breaking out of sound bases. Looking for causes to explain phenomena is a typical human behavior. But over the long haul, objective analysis beats pet theories every time.

The buy switch will be on once market reclaims its 50-DMA and the recent high of 11,856. The status will be upgraded to a Confirmed Uptrend and we will initiate a fresh position in stocks that stand tall on the O’Neil methodology checklist. This will ideally be the case in the first two scenarios mentioned above.

In the third scenario, market could remain under pressure. The buy switch will be off if the Nifty breaches its 200-DMA and the status could be downgraded to a Downtrend if the distribution day count increases to six or seven. In that case, we would wait for markets to hold their lows for at least three days before attempting a rally. Investors should add to positions only after a follow-through day (1.5% upward move) is observed.

When the market status is a Downtrend, we would prefer to sit on cash and wait for markets to stabilize.

Looking Forward:

After the election results on May 23, the focus is likely to move back to growth and demand drivers.

Falling GDP estimates: The RBI expects a growth of ~7.2% for 2019-20, but some street estimates are under 7% as well.

Weak consumer demand: The Q4 FY19 financial results of companies from the consumption sector hints towards consistent weakening in consumer demand. The impact is visible on sectors like Auto and FMCG, among others.

Improved credit growth: Credit growth has improved in FY19 (13.2% against 9.8% in FY18). Retail has been the biggest source of growth, with housing loan, personal loan, and credit card segments growing the most.

But PSU Banks are still struggling: Growth has mostly been delivered by private banks, while PSU banks are still struggling to catch up. Except the two big banks (SBI and Bank of Baroda), most other PSBs are still under the burden of NPAs and provisions. Liquidity still remains a concern with PSU banks.

Auto sector reported 17% y/y fall in April sales: A tenth consecutive month of falling car sales, for the first time in eight years, was the main cause.

Muted volume in the FMCG segment: Q4 volume for FMCG majors like Hindustan Unilever and Godrej Consumers, among others, indicates weak demand. Rural demand has been weak due to low farm incomes and below-average rainfall.

Sectors outperforming the market:  Over the last one month, Banking and Financial Services stocks have been the most resilient, along with IT and FMCG. Some of the leading stocks in these sectors recently crossed their all-time highs before correcting minutely due to general market weakness.

Stocks underperforming the market: Nifty Auto has consistently underperformed since September 2018, with the stocks trading below its key moving averages. Nifty Pharma index, however, showed sharp underperformance in the past one month and breached its 50- and 200-DMA. Realty stocks showed some momentum in March-April but underperformed the market over the last one month.

Mixed Q4 results:

As of May 15, 27 Nifty50 companies have reported their Q4 results, of which only four companies beat street estimates, 17 reported in line, and six missed expectations.

However, EPS growth estimates decreased to 16% for the ongoing fiscal year and 14% for FY20. Banks have mostly reported better-than-expected to in-line results. On the other hand, Auto stocks like Eicher motors and Maruti missed expectations.

 Continue reading with a MarketSmith India Premium subscription…

To Read Detailed Reports including Stock Recommendations, Idea Lists, Evaluate Stocks etc. Subscribe to MarketSmith India.

Industry Update: December 2018

On December 10, the Indian market was moved to an Uptrend Under Pressure. The distribution day count is at three. Amid turmoil in the developed market indices, in year 2018, FIIs sold more than 70,000 Crore stocks in India. Despite that, Indian markets showed resilience with DII’s emerging as net buyer with accumulation of more than 1 lakh cr. Auto (-23%), Media (-23%), Metal (-21%), and Realty (-31%)  underperformed, while Nifty IT (27%), FMCG(14%),  and private banks (8%) outperformed and helped markets post modest gains this year.

Of the 48 developed and emerging markets tracked by our team, only six are in a Confirmed Uptrend. D-street awaits Q3 results during January; it can chart a new direction for a market that is currently on a bumpy road.

Given below is a quick update for eleven key sectors:

Automobile: The NIFTY Auto Index is in a Confirmed Uptrend and is currently 1.9% above its 50-DMA and 11.2% below its 200-DMA. In 2018, the index underperformed the market, declining 23.1%.

Banking and Finance: The Federal Reserve increased its interest rate by 25bps, while other developed countries kept their key interest rates unchanged. Nifty Bank is constructively trading above 50- and 200-DMA. The index remains in a Confirmed Uptrend.

Basic Materials: Nifty Metal is currently in a Confirmed Uptrend, but trading below its key technical support. The U.S. S&P Metals & Mining Select Industry Index fell 12% in the month of December taking the YTD loss to 27%.

Capital Equipment:  In India, the capital equipment stocks showed signs of moving into an improving and outperforming category. In the U.S., the sector was one among the worst hit in December’s broader market sell-off.

Consumer: Nifty FMCG index had a YTD return of 14%. The index is currently in a Confirmed Uptrend. In December, the S&P 500 index was down about 9% m/m.

Media and Internet: The Nifty Media index gained 0.6% in December. The index declined 27.6% in 2018, erasing 32.7% gain in 2017. The index is trading below 200-DMA, but is able to hold 50-DMA.

Oil and Gas: The Nifty Energy index is trading just above its key support level. It had a muted performance during the month. The stock prices of OMCs recovered gradually over the past month owing to weakening global crude prices.

Pharma and Healthcare: In December, the U.S. pharmaceutical index (IHE) breached all its support levels and is now trading 7% below its 50-DMA, and 17% off highs. Nifty Pharma is in Downtrend. The Indian Pharmaceutical market grew 6.3% in November.

Retail: The Global Retail sector index declined 10.7%. The Indian Retail sector index increased 0.6% m/m compared with 14.7% m/m gain in November.

Technology: NIFTY IT index, comprising of 10 major IT firms, is currently in a Rally Attempt. It is marginally below 50-DMA, but is able to find support at 200-DMA. Philadelphia Semiconductor Index (SOX) lost over 8% in December due to continuing issues like trade war, pressure on Apple, security concerns on Huawei’s products, weakness in end markets, and low cap-ex budget plans of major firms.

Telecom: The S&P BSE Telecom index declined 0.3% in December. The index declined 40.5% in 2018, falling below the index base value of 1000 during its launch in April 2015.

Automobile:

NIFTY Auto Index

•    The NIFTY Auto Index is in a Confirmed Uptrend and is currently 1.9% above its 50-DMA and 11.2% below its 200-DMA.

•   The Auto Index declined 0.4% in December. In 2018, the index underperformed the market, as it declined 23.1%. Tata Motor lost 65% in market cap during 2018.

Global View

•  Globally, Automobile stocks underperformed in 2018, mainly because of lower demand for luxury cars in China due to a slowdown in the economy.

•  There has been a significant increase in the adoption of electric vehicles (EV) to battle increasing pollution levels due to fossil fuels, with many countries formulating favorable policies for EV manufacturing.

Key Developments

  • Alpha Capital invested INR 1.6B in Hero Electric, the electric scooter manufacturer of Hero Moto Corp. The proceeds will be used to construct its second factory in South India, develop new products and expand its dealer network.
  • Mahindra & Mahindra will launch XUV 300, its sub-compact SUV, in February 2019. It aims to garner 15% market share in the segment dominated by Maruti Suzuki Vitara Brezza, Ford Ecosport, and Hyundai Creta.
  • In April—November, automobile sales were 21,945K units (+12.5% y/y). However, domestic passenger vehicle sales declined 3.4% in November, mainly due to weak consumer demand weighed down by insurance costs, price hikes, and liquidity crunch in the NBFC sector.
  • The Government of India plans a levy of INR 12,000 on new petrol and diesel cars in order to boost electric and battery operated vehicles sales. NITI Aayog has proposed cash incentives of INR 25,000–50,000 for EV buyers.

Looking Forward

  • The industry expects that the next general budget would offer some incentives in order to revive consumer demand. Recent farm loan waivers announced by states, coupled with anticipated agriculture-focused spending in the upcoming budget, may fare well for rural demand, largely impacting commuter/economy motorcycle sales.
  • The government is formulating a new National Auto Policy for 2019 which will continue its focus on clean mobility and electric vehicles.
  • The Society of Manufacturers of Electric Vehicles expects that EV sales will increase by more than 100% to 200K units in 2019, owing to the favorable policies by the Government.

Stocks in Watchlist: Maruti Suzuki, Exide Industries, Mahindra & Mahindra

Stocks to Avoid: Tata Motors, Bharat Forge

Banking and Finance:

Nifty Bank: Nifty Bank registered a marginal 1.11% rise during the month. The index remains in a Confirmed Uptrend. In 2018, Bajaj Finance was the top gainer in the space, with a return of 47%. Among private banks, Kotak Mahindra gained 23% in 2018.

Global view

  • The Federal Reserve increased its interest rate by 25bps, taking the benchmark rates between 2.25–2.5%. However, it reduced the projected rate hikes in 2019 from three to two, amid expectations that growth in the U.S. will decelerate in 2019. Stock indices have been moved to a Downtrend as they largely hovered in the red zone during the month.
  • The European Central Bank put an end to the bond-purchasing era. The ECB will discontinue its quantitative easing program from the end of December. According to the Bank, it plans to reinvest cash from maturing bonds for an extended period of time.

Key Developments

  • The Reserve Bank of India approved linking floating rate loans to an external benchmark, effective from April 2019.
  • The Parliament approved the recapitalization plan to infuse INR 41,000 Cr in public sector banks. This will help beneficiary banks to exit the PCA framework.
  • The Monetary Policy Committee maintained the status quo on rates, consistent with the stance of calibrated tightening of monetary policy: repo rate unchanged at 6.5%. Reverse repo at 6.25%, and MSF rate and the Bank Rate at 6.75%.
  • The RBI constituted the Expert Committee on Economic Capital Framework, headed by former RBI governor Dr. Bimal Jalan. It is entrusted with suggesting an adequate level of reserve that the RBI needs to maintain.
  • A recent RBI report on the Indian banking sector indicates that the NPAs have begun to stabilize in H1, but at an elevated level. The profitability of NBFC improved on account of fund-based income, relatively lower NPA levels, and strong capital position.

Looking Forward

The RBI intends to work on the need for adequate recapitalization of public sector banks and strengthening the asset-liability framework for NBFCs. We also expect constructive outcome on the liquidity and PCA norms review in the next board meeting.

Stocks in Watch-list – HDFC Bank, ICICI Bank, RBL Bank

Stocks to Avoid – Yes Bank

Basic Materials sector:

Nifty Metal

Nifty Metal is in a Confirmed Uptrend.

Global Front

The U.S. S&P Metals & Mining Select Industry Index fell 12% in December. The YTD loss of the index stands at 27%. The index is following the general weakness in the U.S. markets. In December, the U.S. market breached its October low and was moved to a Downtrend.

Key Developments

Early in December, palladium prices gold prices for the first time. The prices of palladium increased around 50% in the past four months.

There is robust demand from the automotive sector, as it is used in pollution-control catalytic converters on petrol-powered vehicles. Lately, due to tighter emission standards, petrol vehicles have been replacing the diesel vehicles, increasing the demand for this precious metal. But supply from all major producers, including Russia and South Africa, is not increasing.

• Vedanta announced that it will set up a new steel plant in Jharkhand with an investment of $3B-4B. The plant will have a capacity of 4.5M ton/year. The plant will be part of the company’s newly-acquired Electrosteel Steels Ltd.

• Cement prices fell for fifth consecutive month in December due to excess supply and weak demand. Major players pushed the year’s supply in market, causing excess availability, which in turn pulled prices in the downward direction. Moreover, demand from the southern part of the country is decreasing too.

Looking Forward:

Metal prices are low YTD, with an average 15% fall in prices. The stabilization of metal prices is something that we will be looking forward to in early 2019, as it can boost the overall industry. The performance of the Chinese economy is also important as it is one of the largest consumers of steel and other metals.

Stock in watchlist:

Vedanta Limited.

Stocks to avoid:

Jindal Stainless Hisar limited.

Capital Equipment:

Industries across the globe, particularly in the U.S., continued to lag toward the end of 2018. The sector was among the worst hit in December’s broader market sell-off. Notably, industrials in emerging markets were relatively resilient to broader weakness in comparison with that of the U.S. and other developed markets.

In the U.S., capital equipment stocks posted sharp losses and further broke below key support levels in December. The sector is now 25% below September-end highs, which is the sharpest correction since 2011. Furthermore, distribution was evident in fundamentally strong sub-sectors such as aerospace & defense, safety/security and containers/packaging, which were holding constructively above support levels until November.

In India, as per the RBI’s report, the manufacturing sector maintained its y/y sales growth in Q2 FY 2019. The textile and iron and steel production sectors were leading in the space with the rise in demand. Manufacturing sector (1,734 listed companies analyzed) posted net income of INR 47,100 crore in Q2, which was up 29% y/y.

As the uncertain outlook, which is usually the case during elections, has passed, we can now focus on the quarterly results and pick the leaders.

Key Developments:

• The government of India decided to offer its L&T shares in the Company’s buyback program. The government will receive INR 700 crore at INR 1,475/share in this offering.

• Raysut Cement Company, an Oman-based cement manufacturer, is planning to invest $700M in India by 2022 on acquisitions (one from Chhattisgarh and another from Gujarat’s coastal region) and capacity expansion ($500M). The acquisitions are worth $200M and are expected to be completed in Q1 2019.

Looking Forward:

We expect subdued action across industrial sub-sectors globally, as factors such as rising interest rates, slowdown in growth, trade tensions, and local political developments will outweigh micro factors. Further, the upcoming earnings season in January can act as a key positive catalyst for the sector and the market as a whole.

Stocks in watchlist: L&T, Astral Polt Tec, SKF India
Stocks to avoid:  Graphite India, KEC International

Consumer:
Nifty FMCG Index: In December, the index was up 0.55% m/m, as against the more than 5% growth witnessed in November, closing at a high since October and growing ~14% YTD. The index is currently in a Confirmed Uptrend. The sector managed to stay positive despite the global gloom that prevailed in the markets. In 2018, Bata India and VIP gained more than 40% each.

Global View

In December, the S&P 500 index was down about 9% m/m owing to global market weakness. This also affected the S&P 500 consumer staples index (-9.46% m/m), which underperformed the S&P 500 index marginally. Moreover, the global apparel market continues to struggle in the midst of the tough macroeconomic environment with respect to the ongoing tariff tussle between the U.S. and China. The global lodging and leisure segment continued to suffer as investors turned cautious.

Looking Forward

Following the absorption of demonetization and the goods and services tax, the Indian consumption is expected to improve in 2019. Moreover, the salary hike in 2019 is projected to drift about 9-10% same as in 2018 according to Aon Cocubes, which is expected to boost consumer spending among the urban consumers. However, rural consumption that makes up 50% of the Indian FMCG revenue, and fast-growing online sales are expected to be dominant drivers in 2019.

Stocks in Watchlist

As of December 31, Britannia and Nestle India yielded YTD returns of 31.6% and 43.0%, respectively, comprehensively outperforming India’s broader index Nifty with YTD of >4%. Nestle India is performing constructively above the 50-DMA, while Britannia is consolidating around the same level. Other consumer stocks that show momentum include Hindustan Unilever.

Stocks to Avoid

KRBL Ltd., the basmati rice processing company, generated negative YTD of 53.2%, trading below its 200-DMA. Shares continue to trade below the 50-DMA and are making lower resistance levels.

Media and Internet Sector:

The Nifty Media index gained 0.6% in December, compared with a 2.4% m/m gain in November. The index declined 27.6% in 2018 erasing the 32.7% gain in 2017. Zee Entertainment (ZEE.IN), which constitutes 53.4% of the index, declined 18% YTD.

Key Events

  • The Telecom Regulatory Authority (TRAI) announced a new framework for the pricing of TV channels, effective December 29. As per the new rule, consumers can choose and pay for the channels they want to watch. Earlier, cable and DTH operators were offering a bundle of channels for a fee.
  • GST on cinema tickets below INR 100 is reduced to 12% from 18%, whereas tickets above INR 100 will be levied with 18% tax compared with 28% earlier.

PVR plans to invest INR 25B-30B to add 800-1,000 new screens in the next four years. As of December 2018, the Company operated 748 screens in 64 cities.

Shemaroo Entertainment announced the launch of over-the-top (OTT) streaming service ShemarooMe. The Company plans to launch it in the first quarter of 2019.

Eros International Plc (EROS), the parent company of Eros International Media (EDT.IN) plans to simplify the corporate structure of its Indian subsidiary to make it more transparent. It plans to retain one listing as per the suggestions of the committee appointed by it.

Just Dial’s buyback offer of INR 2.2B opened on December 17. The Company plans to buy back 2.75M shares at INR 800 through the offer, which closes on January 1, 2019.

Swiggy raised $1.0B at a valuation of $3.3B from Naspers, Tencent, and hedge funds Hillhouse Capital and Wellington Management.

Looking Forward:

The decrease in GST will help multiplexes gain market share. The footfall is expected to increase because of lowered movie ticket prices.

Customers will choose less number of TV channels because of the new pricing framework by TRAI. This is expected to help subscription-based video streaming platforms gain market share.

Stocks in watchlist: L&T, Astral Polt Tec, SKF India

Stock to Avoid: Eros International Media

Oil and Gas:

India:

  • The Nifty Energy index, comprising 10 companies belonging to the petroleum, gas, and power sectors on the National Stock Exchange of India, registered lukewarm performance in the near-term. Overall, the index witnessed a ~1.30% rise over the past four weeks.
  • The stock prices of OMCs recovered gradually over the past month owing to a steady weakening of global crude prices.

Global View:

  • Crude oil ended 2018 on a weak note. The dampener for crude came from concerns about a supply glut and global economic pressures. The situation is expected to improve in 2019 with hints of progress on a possible U.S.-China trade deal along with OPEC cutbacks kicking in. Also, pipeline bottlenecks in the U.S. would stunt production.
  • Similarly, natural gas prices, which reached their highest point in November 2018, are expected to continue their journey southward. This is because the slowdown in the global economy will likely continue to push natural gas prices lower.
  • Light Sweet Crude is trading below its 10- and 40-WMA and is currently ~41% off highs, with the next support at ~$42.05. The focus is now on OPEC’s implementation of output cuts in January 2019.

Looking Forward:

The broader market is apprehensive about an economic slowdown for 2019 just as crude supply is rising globally. On the natural gas front, the regulatory approval for the Canadian Kitimat mega LNG export facility is a game changer for the space globally.

Stocks in Watchlist:

Bharat Petroleum and Power Grid Corporation. Over the past four weeks, both have generated high single-digit returns while regaining momentum and are trading above their 50-DMA support.

Stocks to Avoid:

Reliance Infrastructure generated negative returns of 12.3% over the past four weeks, breaching all major support levels.

Pharmaceutical/ Healthcare:

Nifty Pharma

On December 24, we changed the status of Nifty Pharma to a Downtrend from an Uptrend Under Pressure, and the index has underperformed the Indian market by losing 4.3%, while Nifty is down 0.13%. The Indian Pharmaceutical market grew 6.3% in November, way below than 12.2% in October. Torrent Pharmaceuticals was the top performer, which grew 10.6% in November. Among MNCs, Abbott India and GlaxoSmithKline Pharmaceuticals grew 8.3% and 15.9%, respectively.

Global front

In December, the US pharmaceutical index (IHE) has breached all its support levels and is now trading 7% below its 50-DMA, and 17% off-highs. In December, Healthcare was one of the worst performing sectors in the U.S., but in the last week it tried to recover from its lows.

Looking forward

  • In the absence of any major sector event, we expect stock specific actions mainly driven by the US FDA approvals going forward. For FY 2018 (September year end), FDA has approved highest number of drugs at 971, of which Indian companies grabbed 35–40%.
  • With the stabilizing U.S. generic price erosion and ramping up in approvals and launches, we expect stable Q3 numbers from the big Indian generic players. Large Indian companies have 30–40% revenue exposure to the U.S. market.
  • Shares of Dr Reddy will be closely watched for any hearing related to the launch of Suboxone. Mylan-Biocon’s Fulphila (Biosimilar to Neulasta) has reached 10.2% volume share from 5.1% last month in the syringes market. Biocon will be watched for a ramp-up of its biosimilar portfolio in the U.S. and the EU amid intensified competition. Both Dr Reddy and Biocon will present their Q3 numbers in late January.
  • Abbvie has collaborated with Lupin for its novel oncology program, in which Lupin will receive an upfront payment of $30M, and will be entitled for royalties.
  • Sun Pharma, most weighted stock on Nifty Pharma, fell more than 12% in December over its governance issue, and is expected to continue its lackluster performance.
  • ICRA has a stable outlook for the Indian Pharmaceutical industry, and expects a CAGR of 8–10% in FY 2018–2021.

Stock to focus: Glenmark Pharmaceuticals, Torrent Pharmaceuticals, Ipca Labs, Sanofi India.

Retail Sector:

India:

The Indian Retail sector index increased 0.6% m/m compared to 14.7% m/m gain in November. In 2018, the top gainers were V-Mart (+60%) and Avenue Supermarts (+30%).

Global View:

The Global Retail sector index declined 10.7% m/m compared to 1.3% gain in November. It breached April low following the broad market decline. Holiday season sales in the U.S. between November 1 and December 24 grew 5.1% y/y to ~$850B, according to a MasterCard report. The National Retail Federation had forecast 4.3–4.8% growth in sales during the period.

Q3 FY 2019 Results

Lulu Lemon Athletica posted beat-and-rise quarter. However, the Company’s guidance of revenue and comparable sales for Q4 was below street expectations. The stock fell 13.4% in the next trading session.

ULTA Beauty’s Q3 revenue and comparable sales were in-line with expectations. EPS beat the consensus estimates. The Company’s Q4 guidance of revenue, comparable sales, and EPS were below expectations. The stock declined 17.2% in December.

Costco beat revenue estimates but missed EPS expectations in Q1 FY 2019. The stock declined 7.9% post the announcement of results because of lower gross margin. Higher crude oil price and wage increase hurt the Company’s margins.

Key Events:

  • Government barred e-commerce companies from selling products of the companies in which they have controlling interest. It also limited total sales of single vendor in any e-commerce platform to 25%. Exclusive partnerships will become invalid after the implementation of policy in February 2019.
  • Future Retail’s founder Kishore Biyani raised INR 3,000 crore capital to reduce debt in the holding company. This will not affect the shareholding pattern of Future Retail or other listed companies from the group.

Looking Forward:

Implementation of new policy by government in online retailing will help the brick and mortar retailers.

Stocks of Interest:

Aditya Birla Fashion and Retail and Future Retail.

Tech – Hardware (Global): 

Philadelphia Semiconductor Index (SOX) lost over 8% in December due to issues such as trade war, pressure on Apple, security concerns on Huawei’s products, weakness in end markets, and low capex budget plans by major firms. The index continues to remain in a Downtrend and is trading below its 50- and 200-DMA.

Key developments

  • Micron announces Q2 FY 2019 results. While EPS beat estimates, revenue missed the consensus expectations.
  • Cisco made an announcement about the acquisition of silicon photonics company, Luxtera for $660M. The Company aims to integrate Luxtera’s optics capabilities with its portfolio.
  • TSMC has been cleared by the Taiwan’s Environmental Protection Administration (EPA) to build its 3nm chip factory. While this facility is expected to start production by 2022 or 2023, its 5nm chip factory will be completed in 2020.

Looking Forward

  • The U.S.–China trade war can have significant impact on the industry considering the fact that China aims at leading the industry and Huawei ban is impacting the semiconductor value chain.
  • Apple’s declining sales, lawsuits, and low demand for mobile phones are other issues to watch out in the coming months.
  • Ban on Huawei by countries like the U.S., Japan, Australia, New Zealand, and the U.K is expected to create additional opportunities in networking segment for companies like Ericsson, Nokia, and Samsung.

Tech – Indian IT:

NIFTY IT index comprising of 10 major IT firms is down 2%. Index is currently in a Confirmed Uptrend. In 2018, the mid-cap IT companies such as NIIT Tech (+70%), L&T Technology (43%), and Mindtree (40%) gave good returns. From the large-cap names, TCS, Infosys, Tech Mahindra gave 30-40% return in 2018.

Other highlights

  • On December 7, HCL Technologies acquired seven software products from IBM for $1.8B. These products have a TAM of $50B.
  • To decrease fraud and fake news on its platform, Facebook has increased its outsourcing activities to Indian IT firms such as Wipro, HCL Technologies, and Tech Mahindra.

Indian IT sector in 2019

  • Gartner estimates that Indian IT will spend $89.2B (+6.7% y/y) in 2019 and outperform global IT, which is expected to increase its spending by +3.2% y/y.
  • IT services, enterprise software, and IT devices will be the major growth drivers of the Indian IT industry with corresponding increase in spending of 13.5%, 12.9%, and 7.4%, respectively.

Stock of Interest: TCS and Infosys.

Telecom Sector:

The S&P BSE Telecom index declined 0.3% in December compared with 1.2% m/m gain in November. The index declined 40.5% in 2018 falling below the index base value of 1000 during its launch in April 2015.

Key Events

Reliance Jio cleared the separation of tower and fiber assets into two different units. This will help the Company to monetize them in future. The Company also entered into an agreement with Disney India to provide video content on JioCinema app.

Bharti Airtel and Vodafone Idea have made it mandatory to maintain minimum balance for prepaid customers.

Looking Forward:

Telecom companies have started offering bundled services in 2018. Airtel and Vodafone Idea are offering Amazon Prime and Netflix to its postpaid subscribers. Reliance Jio’s agreement with Disney is the one step toward providing bundled service. Reliance Industries is expected to make Jio GigaFiber commercially available from March 2019. Higher capital expenditure will keep the profitability lower next year as well.

Stock to Avoid:

Vodafone Idea.

Swing Trading Portfolio Remains Resolute Despite Muted 2018

An honest post analysis is very vital for investment success. We had a muffled 2018 where major indices such as the Nifty (3.15%), the Sensex (5.91%), Nifty Midcap (-15.42%), and Nifty Smallcap (-29.08%) gave modest returns. We outperformed the key indices as our Swing Trading portfolio generated a return of 40.72%.

Markets were weighed down by volatility in 2018 and we used short-term trends to our advantage. We learned that in an uncertain environment where macroeconomic conditions are not conducive to a bull market, it is important to not waste time in identifying multibagger stocks; rather, accumulating small gains could also help you in beating the market. Continue reading “Swing Trading Portfolio Remains Resolute Despite Muted 2018”