“You can see from foreign flows perspective that that rebound in China is detracting from some of the investment in India. I do not think it changes the longer-term trends, but we are in one of those holding patterns similar to the fourth quarter of 2023,” says Laurence Balanco, CLSA.
What is the take on India right now? We seem to be in shape even though the FII fraternity continues to elude Indian markets and they have been sellers all through this year so far but we have done pretty well.
Yes, it is more of a holding pattern if you look at the Nifty in local currency terms. We have been above and below that 50-day moving average since mid-January. No real sustainable momentum on the upside. So, it is what looks like a more of a rolling correction. You have seen some rotation through the sectors and then the other thing that we have seen most recently in Asia is this breakout in the China market. So, you can see from foreign flows perspective that rebound in China is detracting from some of the investment in India. I do not think it changes the longer-term trends, but we are in one of those holding patterns similar to the fourth quarter of 2023.
Indian markets are perhaps the only large market which are at a record high. All the other markets may be at record YTD high, but Indian markets across the board whether smallcap, midcap or largecap they are at a record high, new life high. What does that mean?
Well, again, it is all about the momentum measurements that we look at and in January, we had high momentum. We have had some volatility. You have retested those highs, as you say, most recently. But the momentum indicators have not confirmed.
And for us, when we typically get those slowing upside momentums, what we tend to see is the markets holding trading ranges and that then sets the platform ultimately for a break to the upside.
But what we take away from the slowing momentum across the boards from smallcaps, midcaps to the larger cap indices is that we continue to see more of this choppy ranging action, even though you have made marginal new highs through the month of April.
Would you say that we have perhaps topped out or at least near the top for the year as far as Nifty is concerned because you did hint about the consolidation that you are expecting?
Yes, I think this trading range sets up for a continuation of the longer-term trends. So, no, I do not think we have seen the half of the year. But if we are looking for the remainder of this quarter, I do you think we will remain in this choppy price action and basically see price swings of 5% to 8% in the range that we have seen so far and then that will set up for a breakout to new all-time highs on a more sustained basis than the choppy moves that we have seen so far.
If I could put it into numbers, are you saying that 22,775, which was the previous top on the Nifty, is that the best case for the year or do you think after some amount of consolidation we could make a dash for a level higher than that? What is your outlook for the year?
Yes, absolutely. The trading range and the volatility that we have seen year-to-date we think that sets a platform for a breakout and new highs for the market, but we have really got to digest the gains, consolidate in the range and you have seen the sector rotation.
You have got the metals and miners breaking out now. You have got auto slowing to the upside. You have obviously had the big breakdown in the IT side. So, that is the sort of rotation that you have seen beneath the surface and that is why we have not seen a sustained move to the upside with the lack of that sort of full participation. The corrective action we have seen in the IT sector in particular and most recently the pharma sector has rolled over too.
What would be the best approach to approach a market like India when you are pitted against a major market moving event like elections? What are you telling your clients?
Look, for us, the elections are sort of an event within this longer-term uptrend, so our view on the technical setup is to pick your levels on this trading range setup, so we accumulate.
We still like the banking sector as the longer-term leadership sector within the market and we would continue to accumulate for an ultimate breakout of the current trading range that we have seen in the market.
So, I do not think that alters the structure and the longer-term trends that we have seen and we do expect the continuation of those. It is just about sort of being patient through this consolidation process.
In particular, what I want to talk about is the Nifty Bank and the banking constituents from the largecap banking pack because that, of course, has a big bearing on the way the index as well is going to move and the rest of the market mood as well. We have seen negative news flow come in for Kotak Bank with the regulator slapping a ban on them. ICICI Bank, decent set of earnings there. HDFC Bank has been much of an outperformer and Axis has had some earnings propeller behind it and that sort of moved up higher. How do you see some of these banking stocks move going forward and would you say that there is going to be stark leadership with ICICI Bank and Axis on one hand and the rest of them lagging on the other?
I mean that is quite interesting. If you look at the PSU banks, for example, that has been the big relative group leading broader banks index since the 2020 lows and we think from a longer-term perspective that PSU banks will continue that re-rating.
If you look at it, they have barely retraced half of the de-rating that they have seen from the relative highs that they made back in 2013.
So, State Bank of India is still a key longer-term breakout candidate, which is currently in a holding pattern, but we think it will trade higher and then on the private sector bank side I do think ICICI is sort of best positioned the way that trends traced out and then Axis Bank’s recovery that you have seen over the past week does set it for a continuation of the breakout and then you have got Kotak and HDFC which over the past ten-and-a-half years have been trapped in these very broad trading ranges.
For HDFC, quite interestingly, we see that it trading back towards the top of that range towards the 1700, where Kotak remains in the lower half of its trading range. So, again, we reiterate this point about the sort of dispersion of performance and be more selective down to the stock level.
How much more for IT stocks to consolidate before their corrective phase is over?
I do not even think we have seen the slowing downside momentum from their recent breakdown. So, it is not as if we have seen them starting to base out or showing slowing downside momentum. So, I still think we are at least a quarter away from seeing any kind of basing process or slowing downside momentum to suggest that you have a short, bottom fishing bar set up.
This year metals have been shining fairly bright, whether it is the global metal prices and the commodity prices or the stock prices back home. Within the metals basket, is there any specific name that you would want to highlight?
I will stick to the underlying commodities, but just sort of highlighting, in the base metals in particular both the copper and aluminium breakout, momentums confirmed the highs for those metals, so we do think that there is further gains and big breakouts from consolidation patterns there.
And on the gold side, we are still looking at 2500 to 2550 as the upside target from the trading range you broke out earlier this year which was basically in place since the August 2020 highs. So those three metals really stand out with momentum and further gains.
Aside of that the one segment which has done really well in the Indian markets and continues to do so is the larger PSU pack and I am talking ex-banks here and within that, of course, there are a lot of individual cases, defence, manufacturing, a lot of these allied energy themes, etc. Any charts that look interesting there to you?
Well, I would go back to that PSU bank comment that I made earlier on and if we have to extend that to the broader market, definitely the public sector side, the PSU side, does show significant re-rating that started from 2020 and we think we are only halfway or one-third of the way through that re-rating process. So, definitely PSU banks, as well as the broader PSU companies I think are key leadership going forward within the Indian market.
And where within Nifty do you now then find leadership and the laggards? You have already talked about individual cases within private banks and of course IT that you believe is going to weigh down heavy, but what about the leadership stocks within Nifty?
Again sticking to the sectors here, most recent rollover in a sector to avoid is the pharmaceutical side, that had been a great outperformer over the past 12 months, but that has clearly rolled over, broken down both in absolute and relative terms, so I think pharma is one that joins the IT sector in a de-rating process and one to avoid.
And then, like I said earlier on, I think some patience on the bank side to slowly accumulate in that space because that would lead the breakouts and the more sustained breakout that we see at the Nifty level towards the end of this quarter and into the third quarter rather than being imminent breakouts in the next week or so.
