Weekly Flash
January 08, 2022 (Saturday)
Indian Market Summary:
The Sensex and Nifty started the new year solidly by notching gains of 2.6% each even as global equities declined post release of Fed’s December minutes of meeting. The gains were mainly driven by Banks (Bank Nifty up 6.4%) as the sector played catch up after underperforming in much of December. Investors took profits off the table from tech counters. Mid and Small cap indices underperformed the Nifty mainly as the latter was driven by Banking names.
Grasim (10.8%) and ONGC (10.3%) were the top gainers in the Nifty while Tech Mah (-4.8%) and Infosys (-3.9%) were the major losers. Among other notable gainers were KPIT (tied up with German co to offer solutions for smart charging of electric vehicles), Greaves Cotton (On robust sales of its 2W EVs), AU Small Finance (on healthy quarterly advances growth). Sugar stocks were in limelight on expectations of firm sugar prices and higher revenue from Ethanol.
Sector-wise, the Banking sector stood out this week. This sector had underperformed during the December correction on sustained FII selling, weak credit growth outlook and perceived threat to profits from new age fintechs. However, the sector notched strong gains this week as FIIs turned buyers (presumably in banking names) and on reports suggesting that credit growth is improving. Tech names underperformed on weakness in Nasdaq after the US yield shot up to 1.77% from 1.51% W-o-W. Metal stocks performed well.
Exhibit 01: Sectoral Indices Performance
Exhibit 02: Top Gainers/Losers (NIFTY 500) – Weekly Performance
Exhibit 03: Top Gainers/Losers (NIFTY 500) – Monthly Performance
Global market Summary:
All the three US indices closed lower for the week. The tech-heavy Nasdaq posted its worst week since February 2021, down about 4.5% in the first five trading days of 2022. The S&P 500 was off by 1.8%, while the Dow lost only 0.29%. The selloff was triggered by the release of the Fed’s December minutes of meeting which showed the central bank is ready to roll back monetary stimulus more rapidly than some had anticipated, including taking steps to shrink its balance sheet while raising rates. Tech stocks were hammered as yields rose to 1.77%. Note that higher yields erode the present value of future cash flows leading to decline in valuations. The decline is more in growth stocks (typically tech stocks) which typically trade at high valuations. The much awaited Jobs report showed an increase of 199,000 in December, substantially lower than estimated. However, Average hourly earnings increased by 0.6%, above expectations (which is inflationary). And the unemployment rate fell to 3.9%, the lowest level since February 2020 and well below the 4.1% expected.
Inflation in the euro zone hit a new record high in December, raising more questions about the European Central Bank’s policy. Preliminary data showed Friday that headline inflation came in at 5% for the month, compared to the same month last year, this follows November’s all-time high of 4.9%.
On the political front, foreign affairs ministers of the North Atlantic Treaty Organization (NATO) are gathering virtually Friday to discuss Russia’s troop build-up near Ukraine. Their meeting precedes high-level talks between Russia, the U.S. and NATO next week.
Exhibit 04: Global Indices Performance
Fund Flows:
The FIIs were net buyers this week (Rs 32 bn, source: NSDL) and so were the DIIs (Rs 32 bn). In the past few months, FIIs have generally been negative on emerging markets and have taken out money from other emerging markets as well. Since India is also part of the emerging markets, it has also had its share of selling pressure. Outlook for FII flows is not great as 1) High relative valuations of Indian equities 2) Rising US yields and 3) Withdrawal of global liquidity will weigh on emerging market flows. However, FIIs continue to be buyers in the Primary market (IPOs).
Exhibit 05: Fund flows in India & other Emerging Markets (US $mn)
Commodities:
According to a new report issued by the China Iron and Steel Association, steel prices could come under pressure in the coming months but the decline is not expected to be significant. Growth in China, the world’s second-largest economy, has been slowing for two quarters amid concerns about a deflating property bubble and Evergrande’s debt crisis. The property downturn is projected to continue through 2022. This is not good news for steel producers. China’s steel demand is expected to fall 0.7% to 947 million tons in 2022, following a 4.7% decline in 2021, dragged down by weakening property sector and COVID-19 uncertainties.
After a steep correction in December, domestic steel companies have rolled over prices in January and believe that the market may have bottomed out. According to data from Steel Mint, trade prices for hot rolled coil (HRC) – a benchmark for flat steel – stood at Rs 67,500 a tonne at the beginning of December and at Rs 63,100 at the end of the month.
According to Fast markets MB, benchmark 62% Fe fines imported into Northern China were changing hands for $128.03 a tonne during morning trading, up 0.3% compared to Thursday’s closing, the highest since October 12. The iron ore price has risen on expectations of a recovery in Chinese demand after the Beijing 2022 Olympics next month. Top steel producer China is expected to maintain output restrictions to ensure clean air during the Games. However, domestic iron ore producer NMDC has recently cut iron ore prices.
Crude prices rose this week to USD 82/barrel due to supply disruptions in Kazakhstan and Libya. Protests began in Kazakhstan’s oil-rich western regions after state price caps on butane and propane were removed on New Year’s Day. Production at Kazakhstan’s top oilfield Tengiz was reduced on Thursday, its operator Chevron Corp said, as some contractors disrupted train lines in support of protests taking place across the central Asian country. Production in Libya has dropped to 729,000 barrels per day from a high of 1.3 million bpd last year, partly due to pipeline maintenance work.
Exhibit 06: Commodities price movement
Valuations:
At 17,812 level, the Nifty is trading at 22x FY23E earnings and at 19.5x FY24E earnings. The Nifty one year forward PE is trading above historical levels but we need to take into account that the composition of Nifty has also been changing in favor of growth and quality stocks which command higher PE ratios.
Going into the second week of January 2022, we will be monitoring the results of the IT companies; we expect earnings to be strong. However, we can’t rule out profit booking despite good numbers as the sector stocks have gained in Q3FY22. We also need to monitor the movement in US treasury yields and Inflation data. Crude prices have also risen to USD 82, which might weigh on the INR. Post that, expectations will start getting built up regarding the Union Budget. We expect stocks from Defense and Infrastructure to rally in the run-up to the Budget.
Our preferred sectors would be Private sector banks, Pharma, IT, Capital Goods, Auto components and Telecom. Aviation, Travel and Media could see volatility but can be accumulated on sharp drawdowns in values. Upstream oil companies may be a tactical buy while oil marketing companies may be a sell as they may not pass on the higher crude prices to consumers.
Exhibit 07: Key Valuation Indicators of NIFTY 50
Disclaimer: The views expressed here are based solely on information available publicly/internal data/other reliable sources believed to be true. Facts presented have been verified, however, the same may contain human errors/ errors from database. The information is provided merely as a complementary service and do not constitute an offer, solicitation for the purchase or sale of any financial instruments, inducement, promise, guarantee, warranty, or as an official confirmation of any transactions or contract of any kind.