Nifty Closed Higher By 0.62% Despite Tepid Global Cues; But Helped By RIL & Optimism About Better Poll Prospects Of BJP In The Ongoing State Elections And Hopes Of GST Implementation By July-Sep’17

Market Wrap: 06/03/2017 (19:00)

Market may be already discounting a likely BJP win including UP (except Punjab) and may rally towards life time high even before exit poll on Friday evening in a classic scenario like “buy the rumour and sell the news”; but in case of any unexpected bad result for BJP/NAMO, market may also correct significantly by around 8-10% in the coming days.

Time & Price action suggests that, Nifty Fut (March @8978) has to sustain over 9020-9035 area for further rally towards 9075-9125 & 9195-9260 in the short term (under bullish case scenario).

On the other side, sustaining below 8995 zone, NF may fall towards 8945-8900/8870 & 8830-8775 area in the near term (under bear case scenario).

Similarly, BNF (LTP: 20740) has to sustain over 20950 area for further rally towards 21050-21150 & 21350-21500 area in the near term (under bullish case scenario).

On the other side, sustaining below 20900 area, BNF may fall towards 20750-20600 & 20500-20425/20250 zone in the near term (under bear case scenario).

Nifty Fut (March) today closed around 8978 (+55 points) after making an opening session low of 8928 and late day high of 8985. Indian market today opened almost flat following tepid global cues after North Korea again tested some long range missiles, which incidentally landed in Japan’s coast line territory (special economic zone). As a result, risk trade was somewhat subdued and smart money was flowing towards safety of Yen and USTSY and Japan as well as other major global markets except China was trading lower. Global market was also tepid after an allegation by Trump that during his election campaign & afterwards, Obama wiretapped his mobile; although this was denied by the later vehemently.

Elsewhere, political risk in France is again on the rise as a potential Prez candidate (Juppe), who was also a former PM of France in 1995-97 has withdrawn himself from the Presidential election run up; Juppe was seen as one of the market’s favourite candidate after withdrawal of another market favourite candidate Fillion, hit hard by his wife’s graft allegation. Although, the approval rate of extreme rightist candidate (Le Pen) is now lower from the centrist candidate (Macron), it seems that market does not trust the opinion polls anymore after tragic shock of Brexit & Trumpism and any win for Le Pen can trigger another types of Brexit (Frexit).

In this backdrop of ongoing geo-political risk, be it in EU or in US, it seems that Indian democracy is politically very stable under leadership of NAMO & his economic policies (Modinomics), despite DeMo blues. As of now, there is no acceptable national political leader like NAMO and despite, best effort by RAGA, he is nowhere in the real politics or voter’s mind. Thus, as par the unofficial betting circles, BJP/NAMO is going to win big in UP despite duel chorus of “Karan-Arjun” (Akhilesh & RAGA). Also, BJP is expected to win all the other states except Punjab by big margin and that is being discounted by the Indian market as of now.

A convincing BJP win in all the states including UP may bring NAMO for a near majority in the RS and it may also virtually ensure smooth sailing of him in the 2019 general election; we may see more effective implementation of vital economic reforms including GST and land & labour bills. But, election is also an uncertain event, especially for a big & complex state like UP, where the present CM enjoys a significant popularity and market may also remember some shocking result for BJP/NAMO in the recent big elections in Bihar & Delhi. There is also significant risk for NAMO in UP despite his repeated campaigns and road shows, which may be also an indication that. BJP is not 100% confident about its prospect in UP and thus want no stone left unturned; NAMO is campaigning in UP like a general election & not a state election.

Indian market may further rally towards the life time high even before 10^th March, exit poll day in the evening on the hops of a massive BJP win in UP, which is seen as a verdict for DeMo. But, even if NAMO wins in UP by a major margin, market may also behave like “buy the rumour & sell the news” after the actual election result on 11^th March (Saturday) as despite all the narratives, valuations are not cheap at Nifty 9000-9200 level and there are no lack of headwinds.  

After state election euphoria, market may focus on realities like bank NPA resolution, any spillover effects of the DeMo in Q4 & subsequent quarters, Q4 earnings trajectory after better than expected Q3 earnings on the back of various factors out of DeMo. Also, a hawkish RBI & Fed and an impending threat of El-Nino this year along with growing EU political risks, Trump Tantrum and an end of easy money policy by the central bankers, including Fed, ECB, BOJ & PBOC are some of the major headwinds.

Indian market today also took positive cues from the GST front as IGST, CGST etc were approved by the GST council in the weekend as expected. Now, GST council will again meet on 18^th March to finalize the final draft laws and taxation slabs for various goods & services and the same will go for the Parliament approval in the 2^nd half of the forthcoming budget session. FM is very optimistic that Parliament & RS will pass the final GST bill in this session and it will be implemented from 1^st July or Sep’17. But, we may also see some GST politics as usual in the forthcoming Parliament session as there are no lack of political controversies or issues, for which both the ruling as well as the opposition party may be blamed and eventually, the final passage & implementation of GST may be further delayed to Jan or April’18, being the next FY.

Also time is very short for an effective roll out of the GST from July-Sep’17, especially for the small traders. If the small traders will not register, then they will be not entitled for any input tax credit and also, to prove that their gross turnover is below the required voluntary threshold limit, they will need to maintain the account properly and submit the return also.

So, a hurried roll out of GST may bring more chaos and thus BJP/Govt may also want to implement it with a reasonable time period after actual final passage of the same in the Parliament and in that scenario, a 2018 timeline may looks fair. Also, there are still various ambiguities in the draft GST laws, like e-permit for logistics (interstate movements) and service tax obligation for the outsourcing IT companies, which need to be resolved in consultation with various stake holders.

At present form of GST, it may be a far cry from the concept of “one nation & one tax” and also under various regulations & ambiguities in the real life of business transactions (like bifurcation of the GST dealers under state GST & central GST as par applicable turnover, which may add more confusions and regulations & red tapes, instead of deregulations). Above all, Indian business community is not yet GST ready, especially the small traders as the bill is hanging in the Parliament for now over a decade, thanks to the game of ping-pong between BJP & INC; both are responsible for the inordinate delays in this GST politics.

A defective GST in design may do more harm to the economy rather than contributing anything meaningfully to the GDP & the earnings of the corporates/business.

Domestic market was mainly supported by RIL today as more and more analysts are upgrading it on the back of better prospects of R-Jio and its Petchem/energy business. R-Jio has projected an EBITDA margin of 50% and revenue of almost 50% of the total Indian market by FY-21. As on date, the number one telecom operator in India (Bharti Airtel) has around 35% o EBITDA margin; although the NP margin was around 13% in the previous years, after R-Jio aggression, Bharti reported it as 2.77% in Q3FY17 on standalone basis. The telecom industry may go for further blood bath in its present war on data prices and the overall ARPU may remain very tepid in the coming months, despite R-Jio’s optimism about more value added subscribers for data at above 500/- pm. R-Jio may be in a advantageous position for its low operating costs optical fiber cable network and IP based protocols, but Bharti & Vodafone is also upgrading their networks infra in a war footing; there may be significant competition in the telecom/data space in the coming months.

IT outsourcing counters were in slight pressure today, after reports of temporary suspension of the express H1B VISA facilities amid ongoing concern about the whole issue as a result of Trump’s “America First” policy.

Iniaan market sentimet today also got some boost after GS upgraded Nifty for an 2017 target of 9000  and  2018 target of 10300 on the nack of expected earnings recovery. 

Technically, Nifty need to close consistently above 9000-9075 zone for 10100 in FY-18; othrwise it will come down to 7900-7740 zone.

Globally, all eyes will be on next Friday’s US NFP job data as Yellen virtually assured the market that Fed is going to hike on 15^th March, unless incoming US economic data looks terrible in the next two weeks. Although, it may not be proper for a central bank like Fed to rely on an extremely narrow set of data for its monetary policy, the fact that Yellen may be indicating a caveat for Friday’s NFP data rather than the average for the last few months of the same just to give an excuse to not hike the rate on 15^th March.

In any way, if Fed will not hike on 15^th March this time after so much hawkish scripts and FFR is now around almost 90-100%, USD will be sold off heavily. Although, a weak USD may be good for EM & the Indian market, an abrupt fall in USD this time, in case of no Fed hike may also trigger a “risk off “ trade around the globe and Indian market may also be affected. On the other side, Indian market may not be yet discounted for a March Fed hike and in that scenario, may also suffer some headwinds.

Apart from NFP this week, all the eyes may be on the ECB on 9^th March, where Draghi may also unveil some hawkish stuffs as EU economy is gradually improving on the back of a devalued currency and headline CPI is also good; although core CPI remains tepid around 0.90%; ECB may choose to be on the hawkish side just to have the parity between EURUSD at present level, which may be ideal for both export & import obligations of the EU economy; otherwise divergence between Fed & ECB’s monetary policy may increase further. The same is true for BOJ & PBOC and thus, easy money policy of all the major central bankers may be coming to an end till next recession and RBI will have to be also on the hawkish side, just to keep the present differential of USDINR & real bond yields to attract FPIS inflows in the bond market.

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