Global cues, Covid set tone for markets

Buoyed by reports that the economy gradually getting back on rails, better than expected manufacturing PMI, auto sales data, positive global cues and developments over a vaccine against the novel coronavirus; the domestic stock markets notched gains for the third consecutive week.

The BSE Sensex and Nifty-50 climbed over two percent and hit nearly four month-high during the week, taking the total three-week gains to more than six percent. Benchmark indices the Nifty and the Sensex closed at 10,607 and 36,021 respectively.

It is pertinent to understand that the benchmark and broader indices have surged 39-42 percent from their March 23 low level. FIIs were net sellers to the tune of Rs 5,333 crore. However, DIIs played a supportive role by buying Rs 5,041 crore worth of shares during the week.

Looking at the headline figures, foreign companies still appear to be piling into India even as its economy reels from the pandemic. Since the country went into lockdown in March, some $20bn of cross-border deals have been announced, with the likes of Facebook, KKR a private-equity giant, and Intel sticking cash into digital firms, solar parks and more.

With the economy forecast to shrink by five per cent this year and firms prowling for alternatives to China, many think that India would open the door. The PM in his speech on May 12 said that India should take part in global supply chains also mentioned 'self-reliance' 17 times mirroring protectionism.

Banning the Chinese apps and the government prodding e-commerce firms to have country of origin labelling on goods they sell, confirm government's firm resolve on being Vocal for Local. With globalization confronted by economic nationalism, once the pandemic passes, India must show that it is still open for business say observers.

Near term direction of markets will be dictated by the rise in the coronavirus cases, geo political developments between India-China, forex changes, FIIs activity, trends in crude oil prices and global cues.

Heard on the Street: Many people missed out on the opportunity to buy when the NSE Nifty / BSE Sensex down by at least 35 per cent. There are two reasons: first, people didn't want to catch a falling knife, and second, people didn't expect a V-shaped recovery.

The only people who benefited from the crash were those who didn't read the news and paid little attention to forecasts and predictions given by so-called experts and financial analysts. In other words, the more stupid they were, the more money they made.

They bought some when the market was down by 10 per cent, bought more at 20 per cent, and more at 30 per cent. Then, they forgot what they bought and were more engrossed in the China border issue. They probably still don't remember now. Good for them because if they had, they would have sold what they bought to lock in the short-term profits.

F&O / SECTOR WATCH

Mirroring the bullish undertone in cash market, derivatives segment continued to witness brisk activity. The options data indicates that the maximum Open Interest (OI) on the Put side is at 10,400 strike and the maximum open interest on the Call side is at 11,000. Option activity suggests consolidation of market at current levels in a broad range of 10,400-11,000.

The Implied Volatility (IV) of Calls closed at 24.12 per cent, while that for Put options closed at 27.89 per cent. The Nifty VIX for the week closed at 26.51 per cent and is expected to remain sideways. The India VIX declined by 10 percent to end at a 3-month low of 25.7 levels.

PCR OI for the week closed at 1.53 indicates more Put writing as compared to Calls. Bank Nifty faces strong resistance at 22,450 levels. Follow through buying above this level may propel it towards 23,000 level. Buy on dips strategy should be used to create fresh longs. Media reports suggest that the Government of India has asked the industry to prepare a list of products imported from China; this would help identify non-essential imports, for which local substitutes could then be made available.

From a sectoral perspective, auto, consumer durables, pharmaceuticals, telecom, chemicals and renewable power sector (solar) seem to be the most dependent in terms of sourcing from China. In the pharma sector, dependency on China is ~60-70% for key starting materials.

In case of any tariff or import curbs, Sun Pharma and Cipla would be the least impacted. Sun Pharma and Cipla are fully integrated and have considerable exposure to the branded business. From the consumer durables space, Havells and Crompton Greaves would be the least impacted due to low exposure to China.

Voltas would be the most affected in case of tariff hikes. Telecom companies are dependent on network equipment providers like Huawei and ZTE for network access, which includes front-end telecom sites as well as backhaul network. In auto components, 27 per cent of total import content is from China with the country being a key supplier of sub-components used in engine, electrical/electronics, alloy wheels, tyres, etc.

Raw material imports from China for Indian agrochemical industry ranges between 10-50 per cent depending on the product portfolio. It is important to observe how companies from these sectors navigate in these trying times. Stock futures looking good are Ambuja Cements, Bharti Airtel, Cummins India, HCL Tech, ITC, SAIL and TCS.

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