Monday, 5 February 2018

Nifty Tumbled On Concern About Fiscal Deficit Breach & Imposition Of LTCGT & Muted Global Cues Amid Surge In Bond Yields

Market Wrap: 02/02/2018 (17:00)

NSE-NF (Feb):10741 (-293; -2.17%)

(NS: 10761; Q2FY18 EPS: 391; Q2FY18 PE: 27.52; Abv 2-SD of 25; Avg FWD PE: 20; Proj FY-18 EPS: 418; Proj Fair Value: 8360)

NSE-BNF (Jan):26436 (-783; -2.88%)

(BNS: 26451; Q2FY18 EPS: 867; Q2FY18 PE: 30.51; Abv 3-SD of 30; Avg FWD PE: 20; Proj FY-18 EPS: 961; Proj Fair Value: 19220)

For 05/02/2018: Feb-Fut (Key Technical Levels)

Support for NF: 10615/10580-10530*/10475

Resistance for NF: 10660/10750-10795/10895*

Support for BNF: 26400*/26190-26000/25750

Resistance for BNF: 26650/26900*-27050/27200

Trading Idea (Positional):

Technically, Nifty Fut-Jan (NF) has to sustain over 10750 area for further rally towards 10795-10895 & 10935-11050 zone in the short term (under bullish case scenario). 

On the flip side, sustaining below 10730 area, NF may fall towards 10660-10615/10580 & 10530/10475-10415/10375 zone in the short term (under bear case scenario).

Technically, Bank Nifty-Fut (BNF) has to sustain over 26650 area for further rally towards 26900-27050 & 27200-27475 zone in the near term (under bullish case scenario).

On the flip side, sustaining below 26600 area, BNF may fall towards 26400-26190/26000 & 25750/25450-25350/25250 area in the near term (under bear case scenario).

Indian market (Nifty Fut-Feb/India-50) today (2nd Feb) closed around 10740, tumbled by almost 293 points (-2.17%), on worries about fiscal discipline, higher inflation, higher oil, a hawkish central bank (RBI), re-imposition of long term capital gain tax (LTCGT) in the budget yesterday and overall concern of stretched valuation and terrible global cues amid surge in bond yields, which is negative for equities on higher borrowing costs.

Overall, it was a “Black Friday” and bloodbath on the Dalal Street as market gives a thumbs down to the FY-19 budget, which is being seen as politically populist, eyeing for the next series of elections and far away from the fiscal consolidation path; today’s epic fall is the 2nd biggest post-budget day loss.

Moreover, reintroduction of LTCGT on over Rs.1 lakh @10% on LTCG without benefit of the inflation indexation and along with that STT (securities transaction tax) may have made the Indian market “mathematically unattractive” despite grandfathering it up to 31st Jan’18; institutional funds may see some rotational shift towards the safety on bonds.

There were wild rumours in the market today regarding LTCGT applicability, especially with the FII (grandfathering clause). After market hours, government has clarified that grandfathering clause & the overall LTCGT rules are same for all types of market participants including FII.

Government, on its part seems quite deterrent about LTCGT, as it will be eventually applicable to the 5% large investors (institutions, HNI, corporates, LLP), having LTCG of more than Rs.1 lakh in a year; most of the small retail investors (95%) do not actually earn from the market even on long term basis for their psychological mind set-up; on short term basis, most of them (retail) also suffering huge losses from trading & FNO activities, which is not suitable for small retail traders.

Market is apprehending that despite stable INR, FII may relook their India investment strategy on account of fiscal worries & LTCGT rule as overall capital market taxation burden is now huge. FII may also shift their trading on the SGX more in the coming days as SGX may launch derivative contracts of Nifty-50 scrips in the coming days.

Indian bond yield surged:

Indian 10YGSEC bond yield today also surged to 7.664% before closing lower at 7.571% after rumour that RBI is in talks with the government for open market operations (OMO), secondary market bond purchase (Indian version of mini QE) to support bonds from further plunging and may also raise FII limit in the bond (GSEC) market; but all these were subsequently denied by the central bank later.

Market sentiment was further spooked by Fitch’s warning about Indian rating on higher fiscal deficit (combined state & centre well above 6.5%) & high debt/GDP ratio (above 70%) and weak public finances. Government projects fiscal deficit for FY-18 at 3.5% vs earlier est 3.5%; prior: 3.5%; for FY-19, projected fiscal deficit 3.3% vs earlier Govt est 3%; market est: 3.2%.

Earlier, in 2014, government had promised to bring down the fiscal deficit to 3% of GDP by FY-17, which was subsequently pushed back to FY-18 & then FY-19 and now to FY-20. Thus, despite all the so called “green shoots” in the economy, government is not being able to be fiscally disciplined as the entire Indian growth story is dependent on Govt capex for the last few years amid muted private capex & subdued private consumption.

As par Fitch, the government’s commitment to embrace the recommendation of the FRBM committee to adopt a ceiling of 40 % of GDP for central government debt is positive, even though the temporary delay in consolidation makes it unlikely that this debt level will be reached by 2022-23, as recommended by the committee last year.

Any government, on its part can spend unlimited capex to stimulate the economy, but it has also certain costs and thus Indian 10YGSEC bond yield is now hovering around 7.60%, one of the highest in the world and far more than China at around 3.90% or US at around 2.85%.

A combination of historically higher bond yields, higher interest rates and higher imported inflation (highly devalued currency) has made India into a high cost economy over the years, which is now moving towards stagflation (higher inflation & lower growth). This is in sharp contrast to the narrative of global goldilocks economy (decent growth & very low inflation).

The whole Indian economy & consumption story is running on huge currency leverages and on exporters’ earnings (such as IT outsource) as 1 USD is fetching 65 INR (vs 6.30 Yuan). Also, DeMo (war on black money) is affecting Indian consumption story as almost 30% of high value discretionary spending was dependent on black/unaccounted money.

Looking ahead, market may now focus on RBI (7th Feb); if RBI takes a stance of hawkish hold, then expect more pressure on the Indian market as market will then begun to discount a rate hike by RBI in H2FY19 in order to keep present policy parity between INR & USD (Fed), everything being equal.

Today Nifty was supported mostly by TCS, Tech-M, HCL Tech, HUL & ITC by only 4 points altogether, while it was dragged mostly by RIL, HDFC, HDFC Bank, ICICI Bank, Bajaj Fin, Maruti, L&T, Axis Bank, IOC & SBI by around 156 points cumulatively.

Overall, Indian market was today helped by techs to some extent (higher USD), while dragged by almost all the other sectors like banks & financials, automakers, mixed FMCG, media, metals, pharma, reality, consumptions, energies, infra; mid/small caps plunged by over 4% as selling was more intense in the broader market in line with last few weeks as valuations are at crazy level.




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