Leading indicators point to V-shaped recovery

On the back of mixed domestic and global cues, snapping three week's winning streak, benchmark indices Nifty and Sensex ended the week at 14,372 and 48,878, down 62 points and 156 points, respectively. Broader markets were also weaker with the Nifty Midcap and Smallcap falling by 1 per cent and 0.6 per cent. It is pertinent to observe that FIIs have net sold Rs 636 crore worth of shares on last Friday, for the first time after January 6, raising many questions about sustainability of the flows in the near-term. Though in the longer-term India is expected to attract large foreign money, it could be more than previous year. The Indian economy is in the middle of a better-than-expected economic recovery.

Leading indicators point to a V-shaped recovery. Low interest rates have turned out to be a major tailwind for sectors like construction and automobiles. After the statement of FM of a 'Budget like never before', expectations are high on the reforms front. Considering the pain in the MSME sector, Emergency Credit Line Guarantee Scheme (ECLGS) for the MSME sector should be continued for one more year. Badly impacted segments like travel and tourism need timely relief. Covid severely impacted urban employment much more than rural employment. To create more urban jobs, urban-centric MGNREGS is on cards, say insiders. Bankers expect the government to continue with the strategy of allowing monetary policy to do the heavy lifting while keeping the fiscal stimulus modest will. The government is expected to go for a one-time big fiscal stimulus focusing on spending on vaccination, infrastructure and recapitalisation of banks. Expenditure on vaccination has the potential to become a major fiscal boost since it will facilitate fast return to normalcy. Markets will first react to Reliance numbers in early trade on Monday. The prominent companies declaring Q3 results in the coming week are Kotak Mahindra Bank, Larsen & Toubro, Axis Bank, Hindustan Unilever, Lupin, Maruti Suzuki, Cipla, Dr Reddy's, IndusInd, IOC, Sun Pharma, Tata Motors, Tech Mahindra, Vedanta and ICICI Bank. Near-term direction of the markets will be dictated by the F&O settlement, US Fed meet, Q3 results, rupee / dollar movement, crude oil prices and FII inflows.

Heard on the street

Markets across the globe have been emboldened by upbeat earnings, Covid-19 vaccinations and the Biden administration's $1.9 trillion fiscal-stimulus plan. However, optimism has also pushed up yields on 10-year US government bonds to 1.1 per cent, from 0.9 per cent at the end of 2020, and investors often fear that this makes equities less attractive. This means the bond-market gyrations are all about inflation expectations rising well above pre-outbreak levels. For now, US inflation remains low due to the pandemic, but is predicted to bounce back strongly. Various investment strategies have historically outperformed in periods of 'reflation' or higher inflation. Watch out for the commentary from the US Fed meet, the first under the new regime.

Globe watchers suggest that one should keep a vigilant eye on the events encompassing Beijing (China) as the authorities have ordered mass testing and enforced a strict lockdown after resurgence in cases of the new coronavirus strain. China being a major member in global trade, any serious impact from the new strain may lead to uncertainty. And uncertainties do not bode well with the markets. Remember that the stock market is most dangerous when it looks best; it is most inviting when it looks worst.

Futures & options / sector watch

Ahead of the monthly derivatives expiry and holiday shortened week, derivative segment witnessed heightened volatility and spike in volumes. With the Union Budget on horizon, the rollover data for the next month will also give a signal on how many traders think the market will continue to rally going into February. On the options front, the maximum Call open interest of 51.71 lakh contracts was seen at 15,000 strike, followed by 14,700 and 14,600 strikes, while maximum Put open interest of 33.99 lakh contracts was seen at 14,000 strike, followed by 13,500 and 13,800 strikes. Call writing was seen at 14,500, 14,600 and 14,700 strikes, while Put writing was seen at 13,800, 13,700 and 14,000 strikes. All these indicated that the Nifty could remain in an immediate trading range of 14,200-14,600 levels for coming sessions. The volatility index after touching the highs of 25.41 during the early part of the week closed at 22.42.

PCR OI for the week closed at 1.17 indicates more puts writing than calls. Derivative data suggests that profit booking at higher levels could continue in coming sessions as well. On downside, 14200- 14,150 zone would act as immediate support for Nifty while 14,550-14,600 would be strong resistance. Fuelled by expectations over scrappage policy and buoyant demand, auto stocks were on a roll during the week ended. Bajaj Auto and Tata Motors witnessed good buying interest across the board. Buy on declines TVS Motors and M&M. Following the tracks of autos, tyre stocks logged sharp gains. MRF looks set to breach Rs 100,000 marks, first for an Indian company.

Use declines to buy Apollo Tyres. Modest buying was seen in cement counters over the weekend. Industry sources indicate sharp improvement in capacity utilization, firm price trends and expect cement demand to grow on the back of the government's push on infrastructure projects. Q3 results of Ultratech clearly spell good times for the sector. Buy Ultratech, Ramco Cements and Ambuja Cements. Among the stock futures, buy on declines: Berger Paints, Havells, HUL, SAIL, TVS Motors, TCS and Wipro. Sell on rallies: Bandhan Bank, Bata India, HDFC AMC, Sun Pharma and Kotak Bank.

Stock picks

Nelcast Limited is engaged in the business of manufacture and sale of iron castings. The company is a supplier of ductile iron castings and grey iron castings. The company provides commercial components, including bogie suspension brackets, conventional suspension/engine/steering/ cab mounting brackets, rear and forward differential carriers, flanged and plain half products, wheel hubs, bearing caps, brake drums, and brake disc rotors; and tractor/farm components comprising hydraulic lift covers and front engine support products. The company serves automotive, tractor, construction, mining, railways and general engineering sectors. In the medium to long-term, the projected growth of domestic auto industry and ambitious export plans are likely to benefit the company. The company is a supplier to several OEMs like Tata Motors, Ashok Leyland, TAFE, Eicher Tractors (TMTL), Volvo-Eicher Commercial Vehicles, SAME Tractors, Escorts Tractors, International Tractors, Daimler India and Caterpillar. It has Tier-I customers like Automotive Axles and American Axles, and export customers like Meritor, American Axles and Daimler, Dana, Comer. Post-Covid recovery in auto and engineering industry spells higher order book for the company and exports are back on track. Robust growth of tractor industry is expected to boost company's revenues in the current year. Results of Q3 are expected to be better than expectations in line with other auto ancillaries. Buy in the price band of Rs 65-70 for price target of Rs 95 in short term and Rs 125 in medium term.

(The author is a stock market expert. He is former vice chairman of AP Planning Board)