Monthly Strategy Report March 2013

Monthly Equity Commentary

1-1.B S E

S ENS ITIV .B S E

01/03/13

Tre nd7
20200
20150
20100
20050
20

19950
19900
19850
19800
19750
19700
19650
19600
19550
19500
19450
19400
19350
19300
19250
19200
19150
19100
19050
19

18950
18900
18850
18800
29

30

31

04

05

06

07

08

11

12

13

14

15

18

19

20

21

22

25

26

27

28

D aily

Month Gone By
Frontline Indices:
Week
No

% Chg
Sensex Nifty

-2.06

-2.17

-0.09

-0.27

-0.78

-0.63

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Key Positives
Oil Minister M Veerappa Moily said Diesel prices
would be hiked by 40-50 paise per litre every month
till losses on the fuel are completely wiped out
HSBC Services Business Activity Index rose to 57.5 in
January, up from 55.6 in December
India's per capita income is estimated to have gone
up 11.7% to Rs 5,729 per month in 2012-13 at
current prices
Indias headline inflation declined sharply to 6.62%
in January from 7.18% in December its slowest
pace in three years
After contracting for eight straight months, India's
exports grew by a meagre 0.82% in January to
$25.58 billion
Petrol price was hiked by Rs 1.50 per litre and
diesel by 45 paise a litre
The Reserve Bank of India set the stage for entry of
new banks in the private sector by unveiling the
much-awaited final guidelines

Key Negatives
Manufacturing Purchasing Managers' Index (PMI) stood at 53.3 in
January, down from 54.7 in December
Government revised the economic growth for fiscal 2011-12 to 6.2%
from the earlier estimate of 6.5%
Government's fiscal deficit touched 78.8% of the budget estimates
(BE) in the nine months to Dec 2012
Industrial output contracted by 0.6% in December, the second

consecutive month of decline, mainly due to muted activities in

manufacturing and mining sectors
Consumer price index advanced 10.79% on an annual basis in January,
faster than the 10.56% gain seen in December

Retail inflation for agriculture workers (India) increased to 12.30% in

January mainly due to increase in prices of food items and bus fare.
The same for rural labourers was 12.28% in January
India's foreign direct investment (FDI) inflows declined nearly 19% to
$1.10 billion in December 2012 due to global economic uncertainties.
For the April-December period of 2012-13, the inflows declined by
1

about 42% to $16.94 billion

The index of eight core industries grew by 3.9% in

-2.36

-2.69

January 2013, as against its growth of 2.2% in the

corresponding period of the previous year. The
cumulative growth of the index of the core
industries in the April-December period is 3.2%,
against its growth of 5.0% in the previous year

The government raised freight charges (by ~5%) while leaving

passenger fares untouched in the railway budget for 2013-14

The FY13-14 Union Budget disappointed on various counts, the most

significant being no major initiatives to tackle the growing current

account deficit
Indias GDP grew at a 10-year low of 4.5% during the third quarter of
the current financial year, far lower than 6.1-6.7% growth projected
in the Economic Survey

Global markets:
Indices

Jan-13

Feb-13

% Chg

US - Dow Jones

13860.6

14054.5

1.4

US - Nasdaq

3179.1

3160.2

-0.6

UK - FTSE

6276.9

6360.8

1.3

Japan - Nikkei

11191.3

11559.4

3.3

Germany - DAX

7776.1

7741.7

-0.4

Brazil - Bovespa

59761.0

57424.0

-3.9

Singapore - Strait Times

3282.7

3270.0

-0.4

Hong Kong Hang Seng

23729.5

23020.3

-3.0

India - Sensex

19895.0

18861.5

-5.2

India - Nifty

6034.8

5693.1

-5.7

Indonesia - Jakarta Composite

4453.7

4795.8

7.7

Chinese - Shanghai composite

2385.4

2365.6

-0.8

Sectoral performance:

BSE Indices
Sensex
Smallcap
Midcap
BSE 500
BSE 200

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28-Feb-13
18861.5
6206.2
6302.8
7163.7
2308.0

31-Jan-13
19895.0
7074.1
6970.9
7665.7
2461.1

The world markets ended the month of February 2013 on a mixed

note with a negstive bias. Indonesia, Nikkei, Dow Jones and UK FTSE
were the only gainers, rising 7.7%, 3.3%, 1.4% & 1.3% respectively.
Nifty and Sensex were the largest losers falling 5.7% and 5.2%
respectively, followed by Bovespa and Hang Seng, which fell 3.9% and
3.0% respectively.

Average daily volumes on BSE during the month of Feb 2013 fell
13.9% M-o-M (NSE daily average volumes were lower by 11.7% - M-oM). The average daily derivatives volumes on NSE declined 2.8% to
Rs. 1,28,303 cr in Jan (In Dec: Rs. 1,32,020 cr).

All sectoral indices ended in the negative (except IT and TECk) in the month of February.
The top four losers for the month were Metal, Capital Goods, Power and PSU, which fell
by 14.5%, 12.5%, 10.6%, and 10.4% respectively. IT and TECk, the only gainers, rose by
5.6% and 2.6% respectively.
% chg
-5.19
-12.27
-9.58
-6.55
-6.22

Remarks

BSE 100

5720.1

6091.5

-6.10
Car makers reported falling sales in February as high costs and sluggish economic growth

Auto

10458.6

10993.9

-4.87

Bankex

13203.9

14580.3

-9.44

Capital Goods

9184.5

10495.6

-12.49

Consumer Durables

7172.1

7581.5

-5.40

FMCG
Healthcare

5669.1
7810.3

5921.9
8016.9

-4.27
-2.58

IT

6754.3

6393.6

5.64

Index rose making it the largest gainer in the month across the board on a weak Rupee
TCS announced enpansion plans in the UK
TCS, Hexaware, HCL Technologies and Tech Mahindra were the top performers, rising 12.8%,

Metal

9068.0

10606.1

-14.50

Oil & Gas

8648.1

9359.2

-7.60

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continued to weigh on demand, threatening to result in the industry's first decline in annual
sales in a decade. Car sales during the first 10 months of the current financial year were
down 1.8% compared to the same period last year
Carmakers also gave poor guidance for this quarter after announcing mediocre results,
expecting margins to inch down
The FM announced an increase in excise duty on SUVs from 27% to 30%
Maruti Suzuki, Ashok Leyland, Hero Motocorp and Bharat Forge were the major losers, which
fell by 14.3%, 9.2%, 8.5% and 6.9% respectively
Banks fell heavily (3.6%) after the budget as the government made slightly unrealistic
projections for fiscal deficit in spite of an increase in spending.
Bank of Baroda, IDBI Bank, Union Bank and State Bank of India were the major losers, falling
19.0%, 17.6%, 16.8% and 14.4% respectively
Hopes that the budget would increase duties on imported equipment were not fulfilled
Given the high fiscal deficit and the resulting squeeze in government spending, the onus
remains on the private sector to kick-start the capex cycle
Companies declared poor results for the quarter ended December 31st
Welspun Corp, Suzlon Energy, Punj Lloyd and Siemens were the majorlosers, which fell by
41.8%, 34.5%, 23.4% and 22.8% respectively
Companies declared poor results for the quarter ended December 31st
VIP Inds, Bajaj Electrical, Whirlpool and Titan Inds were the major losers, which fell by
17.2%, 8.5%, 7.4% and 6.9% respectively

8.6%, 5.2% and 4.7% respectively and Financial Technologies and Oracle Fin Serv were the
largest losers, falling 24.6% and 11.6% respectively
Base metals fell across the board with Nickel, Tin and Lead leading the fall
There were concerns that strength in the Chinese property market and other factors may
lead Beijing to tighten policy
Metal companies reported very poor results for the quarter ended December 31st
SAIL, Sterlite, Sesa Goa and Jindal Steel were the top losers, falling 18.1%, 17.6%, 17.1% and
17.0% respectively
Lower provision for under-recoveries in the budget led to a large fall for oil marketing
companies that will face higher losses
ONGC Videsh Ltd acquired participating interest in some foreign fields for a large
investment of $1bn
HPCL, IOCL, BPCL and RIL were the top losers, falling 11.9%, 10.5%, 9.4% and 8.1%
3

respectively
Power

1744.1

1951.2

-10.62

Power companies reported very poor results for the quarter ended December 31st
Promoter stake sale in Suzlon Energy led to large selling in the stock
Suzlon Energy, Adani Power, JSW Energy and Siemens were the top losers, falling 34.5%,

36.8%, 23.5% and 22.8% respectively

PSU

6862.4

7661.8

-10.43

UCO Bank, MMTC, Dena Bank and Bank of Baroda were the top losers, falling 25.2%, 23.2%,

19.8% and 19.0% respectively

Realty companies reported poor results for the quarter ended December 31st
HDIL fell as a partial stake sale by Vice Chairman and Managing Director raised worries that

Realty

2010.4

2238.6

-10.19

TECk

3897.1

3798.4

2.60

other stakeholders would also sell shares. Post Wadhawans 5 million share sale, Citigroup
sold 49.30 lakh shares and Credit Suisse sold ~1 crore shares
DB Realty, Unitech, Anant Raj and Indiabulls Real Est were the top losers, falling 48.1%,
25.9%, 23.9% and 22.3% respectively.

Fund Activity
Particulars
Equities (Cash)
Index Futures
Index Options
Stock Futures
Stock Options
Equities (Cash)

Bond Yields

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Net Buy / Sell Net Buy / Sell Open Interest Open Interest
Feb 13
Jan 13
Feb 13
Jan 13
FII Activity (Rs. in Cr)
13032.3
21617.7
-7783
-266
8520
7215
5560
11159
38077
32734
6403
-221
23236
30795
358
-1127
314
161
MF Activity (Rs. in Cr)
-802
-5212

Remarks
FIIs were reported as strong net buyers in February.
FIIs were large net sellers along with an increase in open interest.
FIIs were net buyers along with an increase in open interest.
FIIs were large net buyers along with a decrease in open interest.
FIIs were net buyers along with an increase in open interest.
MF continued to be the net sellers for the last 8 consecutive months.

Indian G-Sec bond yields ended lower by 4 bps at 7.87% at the end of February 2013 over
January 2013. The yield on Indias bonds was near a 31-month low on optimism Finance
Minister Palaniappan Chidambaram will announce steps to cut the budget deficit. Yields
closed lower as the absence of more debt auctions and hopes of more bond purchases via
open market operations boosted prices.

10 Year Government Bond Yield - Trend

10.50
9.50
8.50

7.50
6.50
5.50
9-Jan

5-Oct

28-Jun

22-Mar

22-Dec

16-Sep

20-Jun

25-Mar

28-Dec10

22-Sep10

28-Jun10

29-Mar10

24-Dec09

1-Oct09

7-Jul-09

8-Apr09

1-Jan09

25-Sep08

1-Jul-08

4.50

Period

Commodities

In February 2013, the Reuters/Jefferies CRB Index of 19 raw materials ended lower by
3.63% to close at 292.95. This was on account of a fall witnessed in commodities like
Lean Hogs (down by 10.6%), Silver (down by 10.0%), Nickel (down by 9.5%), Wheat (down
by 8.0%), Crude Oil (down by 5.6%), Aluminium (down by 5.1%), Gold (down by 5.0%),
Copper (down by 4.4), Heating Oil (down by 3.6%), Coffee (down by 2.1%), Sugar (down
by 1.9%), Cocoa (down by 1.5%) and Corn (down by 1.4%). In January, the CRB rose 3%,
helped by stronger oil, corn and cotton prices. Index has fallen more than 9 percent over
the past year as Europes debt crisis and slowing growth in China cut demand.

Behaviour of commodity prices (including LME 3 month buyer prices for base metals)
during the month ended February 2013 is given below. Base metals dropped largely as
negative news from China weighed on the London Metal Exchange. Worries about
housing-based demand for the metals set a bearish tone causing prices to extend
declines.

Behaviour of commodity prices (including LME 3 month buyer prices for base metals) during the month ended February 2013:
Commodity

Gold

28-Feb-13

1578.1

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31-Jan-13

% Chg

1660.6

-4.97%

Reasons
Gold prices fell 5% in February, ending down without a break from October in the longest string of
monthly declines since 1996.
Strength in the dollar and a rise in U.S. equities helped lure investors away from the precious metal.
Prices fell after the comments by European Central Bank (ECB) President Mario Draghi ignited renewed
economic fears over the euro zone.
5

Prices dropped on speculation the Federal Reserve will wind down U.S. monetary stimulus.
Lack of liquidity during the Asian Lunar Year also exacerbated volatility, exaggerating downward moves.
Emergence of selling by stockists at prevailing higher levels amid a weak global trend mainly led the fall.
Prices fell as the dollar rose against other major currencies
Disagreement among U.S. Federal Reserve officials about its super easy monetary policy weighed on
prices.
Investors sold off commodities with the stock market surging toward a record high.
Prices pressured by a weak outlook for demand as the U.S. economy faces renewed risks.
Worries about an inconclusive Italian election revived investor concerns about instability in the euro
zone and threatened the outlook for fuel demand.

Crude Oil

92.05

97.5

-5.59%

Aluminium

2004.5

2111

-5.05%
Prices on the LME fell below the psychologically significant $8,000 tonne level dragged down by

persistent demand concerns as post-holiday buying from top consumer China remained subdued.

Copper

7850

8215

-4.44%

Zinc

2080

2160

-3.70%

Nickel

16710

18460

-9.48%

Strong dollar also weighted on prices.

Slipped its lowest level in two months on concerns about the global economy & the demand for

industrial metals.

Prices fell the most in four months in London on concern supply is ample amid signs of weaker economic

Tin

23500

25095

-6.36%

Lead

2290

2441

-6.19%

Currencies

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growth in China, the worlds biggest consumer of the metal.

Inventories of nickel tracked by the London Metal Exchange reached the highest level since 2010.
Prices maintained falling trend on heavy selling pressure amidst poor demand from alloy industries.
Declined on disappointing Chinese factory data and concerns over US spending cuts.

The Baltic Dry Index (BDI) lost 3.9% in the month to close at 757. The Baltic Dry Index, a
measure of costs to transport minerals and grains by sea, fell as the market slowed at the
start of the Lunar New Year holiday in China, the worlds biggest importer of
commodities and as the fleets growth outpaced demand for commodities. The Baltic Dry
Index averaged the lowest in 26 years in 2012.

The USD was positive vs other currencies in February 2013. The USD remained strong
against several peers during the month except Brazilian Real holding to higher ground
following a round of upbeat U.S. economic data and as Federal Reserve Chairman Ben
Bernanke backed the central banks stimulus efforts. The greenback found support after
separate reports showed sales of new U.S. homes jumped to their highest pace since mid2008, home prices in 2012 posted their best gain in seven years, and consumer
confidence climbed in February, reaching its highest level in three months.

Given below is a table that shows the depreciation (-)/appreciation (+) of the dollar against various currencies for the month of
February 2013:
USD to:
Pakistani rupee
Hong Kong dollar
Chinese yuan

28-Feb-13
99.08
7.76
6.29

31-Jan-13
96.55
7.76
6.28

Reasons

% Chg
2.6%
0.0%
0.1%

Nosedived against the dollar dragged down by disappointment surrounding the new government

budget for the next fiscal year.

Rupee fell to a six-week low against the U.S. dollar as investors fretted over slower-than-expected

Indian rupee

53.94

53.34

1.1%

Taiwan dollar
Singapore dollar

29.70
1.24

29.49
1.24

0.7%
0.3%

Argentine peso

5.04

4.97

1.5%

domestic growth in the October-December quarter.

Heavy capital outflows as Budget failed to cheer investor sentiment.

Month-end dollar demand from importers, mainly oil companies, also hit the domestic currency.
Globally, strengthening of the dollar against a basket of major currencies also put pressure on

rupee.

Argentina, fell, as investors feared Italy might abandon austerity measures aimed at restoring

confidence in its economy.

Peso fell 13% over the past 12 months.

Euro fell to its lowest since January 10, after the German Ifo survey showed a big jump in business

morale in Germany, suggesting a brighter outlook for the euro zone's largest economy.

German economy had contracted more-than expected, leaving the euro zone on track for a deeper

Euro

0.76

0.74

3.4%

recession

The euro weakened as traders worried that Italy's political crisis will hurt efforts to resolve the

country's fiscal problems.

Euro extended losses to versus the dollar as political uncertainty in Italy and renewed fears of a

debt crisis drove some investors to sell the currency.

Thai baht

29.87

29.72

0.5%

Thailands baht dropped on speculation the central bank will cut interest rates to slow fund inflows

that helped fuel a 2.3 % rally in the currency this year.

The Malaysian ringgit fell against the dollar on Thursday as interbank speculators shrugged off stong

Malaysian ringgit

3.10

3.08

0.9%

Indonesian rupiah

9718.17

9680.54

0.4%

economic growth data and added dollar positions on expectations the U.S. Federal Reserve may stop
buying bonds sooner than expected.
Ringgit fell as a deadline for U.S. spending cuts that may push the worlds largest economy into
recession nears, damping demand for riskier assets.
The yen fell against all 16 of its major peers, extending losses that made it the worst-performing

major currency in the past three months.

Japanese yen

91.84

91.03

0.9%

The yen fell versus the dollar in the longest streak since at least 1971, amid bets Prime Minister

Shinzo Abe will pick a new central-bank governor who will boost monetary stimulus.

Japans Labor Force Survey showed the nations unemployment rate climbed to 4.2% in December

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from 4.1% in the previous month.

Spending among households fell 0.7% in the same period from a year earlier.
Traders sold the currency near this months high on speculation the Bank of Japan will ease

monetary policy further to boost growth in the worlds third-largest economy.

Brazilian real
Korean won

1.98
1086.96

1.99
1084.01

-0.1%
0.3%

Comparison of Equity Returns in various markets - MSCI Indices in US$ terms

MSCI Index
Emerging Markets
BRIC
EM (EMERGING MARKETS)
EM ASIA
EM EUROPE
EM EUROPE & MIDDLE EAST
EM LATIN AMERICA

296.3
1,054.6
451.1
468.6
398.4
3,824.6

-4.3%
-1.4%
-0.2%
-4.5%
-4.5%
-2.9%

4.5%
4.7%
4.3%
5.3%
5.3%
6.8%

-0.3%
-0.1%
0.8%
-1.0%
-1.0%
0.7%

CHINA
INDIA
INDONESIA
KOREA
MALAYSIA
PHILIPPINES
TAIWAN
THAILAND
BRAZIL
CHILE
COLOMBIA
MEXICO
PERU
CZECH REPUBLIC
HUNGARY
POLAND
RUSSIA
TURKEY
EGYPT
MOROCCO
SOUTH AFRICA

62.9
418.1
998.5
430.4
470.1
571.2
273.7
455.0
2,730.9
2,549.1
1,311.6
7,272.5
1,477.3
391.0
534.8
843.5
810.1
634.8
606.3
306.7
536.7

-3.9%
-7.4%
10.1%
4.6%
1.4%
8.6%
0.4%
2.2%
-2.6%
-0.9%
-5.4%
-3.2%
-6.5%
-4.0%
-6.3%
-3.7%
-5.6%
-1.6%
-2.6%
-3.2%
-2.0%

4.8%
-2.8%
14.4%
5.4%
0.2%
20.3%
1.5%
14.7%
7.2%
10.8%
3.8%
6.3%
-2.0%
-5.6%
0.9%
1.2%
6.5%
7.0%
3.1%
-5.6%
1.6%

0.0%
-2.8%
12.6%
0.3%
-3.5%
17.0%
0.6%
8.1%
0.1%
6.5%
-3.6%
2.2%
-7.5%
-9.8%
4.1%
-6.7%
0.3%
0.1%
-4.7%
-2.0%
-7.6%

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Last

MTD

3Mo.

YTD

1 Yr

MSCI Index
Developed Markets
-8.8% EUROPE
-2.3% G7 INDEX
2.0% WORLD
-5.0%
-5.0% ITALY
-10.1% PORTUGAL
NETHERLANDS
0.8% SPAIN
-4.9% NORWAY
12.5% GERMANY
4.7% FRANCE
-1.6% DENMARK
45.2% BELGIUM
-2.5% AUSTRALIA
16.8% GREECE
-20.3% IRELAND
-3.7%
8.0% Frontier Markets
17.4% FM (FRONTIER MARKETS)
-2.2%
-21.0% BULGARIA
-5.0% CROATIA
2.6% ESTONIA
-12.6% KAZAKHSTAN
26.5% GHANA
-6.9% JAMAICA
-23.5% TRINIDAD AND TOBAGO
-8.0% ZIMBABWE

Last

MTD

3Mo.

YTD

1 Yr

1,483.2
1,216.1
1,405.2

-3.0%
0.0%
0.0%

5.4%
6.4%
6.8%

2.6%
4.7%
5.0%

6.5%
7.6%
8.2%

242.5
93.6
2,019.7
401.2
3,006.4
1,756.6
1,445.0
6,390.3
1,327.9
954.3
95.4
133.0

-12.6%
-8.4%
-6.7%
-5.9%
-4.1%
-3.9%
-3.4%
-3.1%
3.1%
3.2%
3.4%
3.6%

-1.4%
10.6%
3.5%
3.7%
3.3%
5.1%
5.5%
10.5%
8.2%
11.9%
20.7%
14.5%

-4.8%
1.2%
0.7%
-0.5%
2.3%
1.0%
2.0%
7.9%
6.2%
8.9%
17.8%
8.2%

-7.4%
-1.6%
9.8%
-5.6%
-2.6%
7.5%
6.3%
17.1%
27.5%
14.2%
1.8%
6.9%

524.1

-0.4%

9.2%

7.0%

9.2%

1,158.2
108.0
891.7
290.1
108.1
1,163.1
113.2
1,324.9

-20.8%
-12.6%
-11.3%
-7.0%
6.1%
8.3%
18.3%
32.2%

9.4%
19.0%
-10.4%
10.4%
10.5%
18.1%
30.1%
37.4%

-7.6%
19.3%
-17.6%
2.0%
7.8%
16.0%
25.7%
37.0%

-39.5%
-16.7%
-28.7%
-0.5%
13.1%
27.0%
-35.6%
56.2%

Top Losers - EM Europe and EM

Europe & Middle East; Frontier
Markets fell the least

The equity markets across the globe ended the month of Feb 2013 on a weak note.
Among the developed markets, Europe was a top loser, which fell by 3% during the
month. However, G7 & World Index ended flat. The EM - Emerging Markets fell by 1.4%
with EM Europe, EM Europe & Middle & BRIC being top losers, down 4.5%, 4.5% & 4.3%
respectively. EM Latin America & EM Asia fell by 2.9% & 1.4% respectively. Frontier
markets fell the least by 0.4% during the month.

Italy, Portugal & Netherlands top

losers
in
developed
markets; Belgium, Australia &
Greece restrict index loss

Amongst the Developed markets, Italy, Portugal, Netherlands & Spain were the top
losers, which fell by 12.6%, 8.4%, 6.7% & 5.9% respectively. Norway, Germany, France &
Denmark also underperformed, falling in the range of 3.1-4.1%. However, the index
losses were restricted due to outperformance from Belgium, Australia, Greece & Ireland,
which reported decent gains of 3.1%, 3.2%, 3.4% & 3.6% respectively.
Italy fell sharply during the month on the back of disappointing economic data and due to
inconclusive elections, which left the economy facing political deadlock and rekindled
fears of a new euro zone debt crisis. Among the economic data, Italys consumer
confidence unexpectedly slipped in January to its lowest level in at least 17 years. Italys
National Institute for Statistics (Istat) said that the countrys confidence index dropped
to 84.6 from 85.7% in December, the worst slump since the series began in 1996. Further,
unemployment was at the highest in more than 13 years. As regards, the election fears,
Italy's messy vote, which gave a majority to the centre-left in the lower house but no
clear control of the Senate to any party, sent shockwaves across the market.
Portugal markets fell on concerns over the country's meager economic growth and high
deficit. Part of the correction can also be attributable to sharp gains reported by the
index in the previous month. The country was among the top three gainers in the month
of January 2013, as Portugal's finance minister said that his government's budget deficit
likely fell below the target of 5% of GDP last year, reflecting successful measures to cut
spending. Portugal raised 1.5 billion ($2 billion) in a debt sale at sharply lower rates as
the bailed-out country continues to benefit from improving market confidence, despite
forecasts saying its recession will deepen.
The Australian index outperformed during the month, as analysts estimated a turnaround
in the US trade post better-than-expected housing and consumer confidence data in US.
Ireland market reported decent gains during the month in anticipation of better than
expected economic data. Operating conditions in the Irish manufacturing sector
continued to improve modestly in February, with slight rises seen in both output and new
orders. A return to growth of employment was also signaled (as per the reports on March

Retail Research

01, 2013). Meanwhile, output prices were raised in response to further cost inflation. The
seasonally adjusted NCB Purchasing Managers Index (PMI), an indicator designed to
provide a single-figure measure of the health of the manufacturing industry, rose to 51.5
in Feb, from 50.3 in the previous month, to signal another modest improvement in
business conditions.
Hungary & Russia drag the EM
Europe and EM Europe &
Middle East index lower

India & Russia pull the BRIC

index lower. Even China &
Brazil underperform.

Retail Research

EM-Europe and EM-Europe & Middle East fell sharply during the month mainly on the back
of disappointing performance by Hungary & Russia, which fell sharply by 6.3% & 5.6%
respectively during the month. Even Czech Republic, Poland & Turkey fell by 4%, 3.7% &
1.6% respectively.
Hungarys business confidence index deteriorated slightly from -11.3 to -12 in February.
In the business sphere industrial and commercial expectations deteriorated. Hungarys
economy is in its second recession in four years after the euro-area crisis cut export
demand, while the government raised corporate taxes and levied the highest bank tax in
Europe, which curbed lending and investment. According to the latest forecast by the
European Commission, the countrys GDP will contract by 0.1% this year after shrinking
1.7% in 2012.
The Russian markets underperformed during the month as the oil prices fell. Russia
receives about half of its budget revenue from the oil and natural gas industry. The
stocks extended declines as Russias industrial output unexpectedly contracted in
January for the first time in more than three years, while industrial production in the
U.S. also shrank last month.
BRIC index fell during the month as all its constituents ended lower during the month
with India & Russia, being the top losers, down 7.4% & 5.6% respectively. China & Brazil
also underperformed, falling by 3.9% & 2.6% respectively during the month.
Bovespa index of Brazil underperformed during the month, as economists covering Brazil
reduced their 2014 growth forecasts to 3.65% from 3.85% estimated earlier, rekindling
concern that a slower recovery will hurt corporate earnings. The index also fell as
pulpmaker Suzano Papel & Celulose SA led declines by commodity exporters as the real
surged after the central bank said inflation requires attention.
China slumped to a month low amid doubts over the sustainability of China's economic
recovery, as well as tighter monetary policy after the central bank drained funds from
the market. China's manufacturing grew at its weakest rate in five months in February as
demand faltered and factories shut down for the Lunar New Year holiday. An industry
10

group, the China Federation of Logistics and Purchasing, said its purchasing managers
index declined to 50.1, down 0.3 points from January. A separate index by HSBC Corp.
fell to 50.4 from January's 52.3. Though, China's economic growth rebounded to 7.9% in
Q4CY12, analysts warn the recovery will be weak and gradual, and growth could be
vulnerable if trade or investment weakens.
Underperformance of EM-Latin
America was mainly led by Peru
& Columbia

Strong
performance
from
Indonesia, Philippines & Korea
restricted the fall in EM Asia

Retail Research

The underperformance of EM-Latin America was mainly led by Peru & Columbia, which
fell by 6.5% & 5.4% respectively. Mexico, Brazil & Chile also disappointed with monthly
losses of 3.2%, 2.6% & 0.9% respectively.
Peru fell during the month as the economys trade-surplus fell by nearly 50%, as demand
for commodities fell. Further, the index fell on the back of decline in the shares of
mining companies during the month.
Columbia reported negative returns during the month, as labour problems and
environmental issues have reduced the countrys coal exports by 75%. Colombia's coal
sector, which typically sits in the shadow of the country's dominant oil industry, has been
thrust to the spotlight as labor unrest and environmental incidents pushed coal prices
higher. Coal shipments account for 12% of Colombia's total exports, placing it second to
oil, which makes up 40% of all exports.
Mexican stocks slumped to their lowest level of the year during the month as telecom
giant America Movil's share price decline weighed on the IPC stock index. Shares in
America Movil drove losses as investors continued to voice concern about the company's
results, its foreign investments, and the impact of a pending telecom reform in Mexico
that could threaten the company's dominant market position. Further, Mexicos industrial
production dropped by 2.1% in Dec for the first since November 2009. This further spoiled
the market sentiments.
Despite underperformance by India & China, the fall in EM-Asia was marginal during the
month largely due to strong gains reported by other Asian markets like Indonesia,
Philippines & Korea, which reported strong gains of 10.1%, 8.6% & 4.6% respectively
during the month. Malaysia & Taiwan reported marginal gains of 1.4% & 0.4%
respectively.
Jakarta index of Indonesia rose sharply during the month on improved earnings outlook.
Morgan Stanley upgraded Indonesia from neutral to positive and now ranks it as its most
preferred Asean 3 market. The securities firm is of the belief that a current account
deficit wont hurt the market. The firm said that its economist Deyi Tan continues to
11

believe that Indonesia will run a current account deficit of 2.4% of gross domestic
product in 2013, but concerns are waning with regard to unfunded current account
deficit due to a combination of improving global growth and loose global monetary
policy.
The Philippines stock index breached the 6,700-mark for the first time in history during
the month as cash-awash investors sought better yields from equities, driving valuations
to dizzying heights. The market continues to remain strong driven by continued flows
domestically and overseas as evidenced by the pick up in value turnover last week versus
the previous week. However, analysts recommend to buy on weakness as market looks
overbought and a correction is due.
Kospi index rose, as foreign investors backed their view of a further short-term rise on
the main board by snapping up futures, triggering algorithmic trading buy orders. The
index had decoupled from a global rise in risk markets in January, underperforming due
to exacerbated concern over local exporters' outlooks from the weakening yen and
strengthening won. But as currency moves recently showed signs of slowing, South
Korean shares have been racing to catch up.

Morocco leads the fall in African

markets

Among the African markets, South Africa, Morocco & Egypt all fell by 2%, 3.2% & 2.6%
respectively. South African stocks ended lower with energy-intensive firms including the
local arm of mining giant ArcelorMittal taking the most points off the main index after
the government said it planned to tax carbon emissions. Egypt's bourse fell as experts
believe that the announced tax on stock market transactions will probably make investors
more reluctant to enter the Egyptian market. A hot air balloon crash in Luxor on
Tuesday, killing 18 tourists, also had negative repercussions on the market.

Frontier markets fell the least

Zimbabwe, Trinidad & Tobago
and Jamaica outperform

Frontier markets fell the least by 0.4% during the month. Bulgaria, Croatia & Estonia
were the top three losers, which fell by 20.8%, 12.6% & 11.3% respectively. However, the
index losses were restricted on the back of outperformance by markets like Zimbabwe,
Trinidad & Tobago and Jamaica, which reported strong gains of 32.2%, 18.3% & 8.3%
respectively.
Bulgarian markets ended the month of Feb on a weak note largely on the back of political
instability. Bulgarian Prime Minister Boyko Borissov submitted his resignation to
Parliament after more than a week of anti-government protests sparked street violence
in the European Unions poorest country. Borissov fell victim to anti-austerity movements
that have shaken governments from Spain to Greece. His focus on budget cuts, which

Retail Research

12

kept the country out of turbulent international bond markets, boosted unemployment,
cut incomes and angered voters.
Zimbabwe stock market stole the show with significant outperformance. It seems that
the index reacted positively to the long-awaited conclusion of the constitution-drafting
process, which had been outstanding for four years. Analysts contend that this signals the
arrival of a less volatile political environment. Others refer to the so-called de-risking of
Africa in general, the positive results of mitigating investment risks on the continent.

Outlook going forward

Global Market Outlook
Italian political crisis worsens

Retail Research

A crisis of the system is what emerges from the Italian elections of February 24/25, 2013.
So far as the market is concerned, the Italian elections have produced the worst possible
outcome.
European national governments, the European Central Bank, the International Monetary
Fund, together with the international media are all calling in unison for a stable
government. The problem is that no one can guarantee such a government: the
bourgeoisie no longer has a party that can guarantee such stable government. The
election result has instilled real terror among the powers-that-be from Brussels to
London, from Berlin to Washington.
Parliament is scheduled to reconvene on March 15 and the parties must work together to
appoint presidents in both the senate and the lower house two key positions that must
be filled in order to keep the business of state moving.
The Italian economy is suffering for the past six quarters, its gross domestic product
has been contracting and it is now 7.8 per cent below its pre-crisis peak in 2007.
The political chaos in Italy undermines its ability to secure financial help from European
partners such as Germany, and affects the European Union as a whole. Access to financial
assistance programs, such as the European Stability Mechanism, depends on a stable
government.
Economists and bankers have become the masters of Europe and they have chosen Italy
as the experimental centre of their power, where they are starting to take the place of
politicians, who are now completely subservient and corrupt.
Moodys Investors Service said Italys inconclusive election outcome is credit negative
because it raises the possibility of new elections, prolonging the countrys political
uncertainty. It could consider downgrading Italys government debt rating in the event of
13

Growth Concerns for Japan

Retail Research

additional material deterioration in the countrys economic prospects or difficulties in

implementing reform.
The reasons Europe is in this mess are the same ones the gloom-and-doom types have
been pointing out all along. Europe has no region-wide strategy to spur growth; the banks
havent been fixed; progress towards integration remains mired in mud; the austerityobsessed approach to reform is counterproductive. The political uncertainty in Italy is
just the latest manifestation of these problems, and the latest signal of how unresolved
the problems are.
Indeed, Italy is facing its worst recession in 20 years, and its austerity measures have
pushed unemployment - particularly among the youth to new highs now above 11 per
cent. Some economists estimate that as many as one in three youth is out of a job in
Italy, and many are looking to emigrate.
To make things even more complicated, the term of Italian President Giorgio Napolitano,
an 87-year-old ex-communist, comes to an end on April 15. As head of state, his
successor must be agreed upon by those recently elected to parliament. If there is no
agreement on his successor, Italy could fall further into the abyss.
Since mid-November, the Japanese Yen has weakened substantially against the USD, Euro
and other currencies. The rapid decline was fueled by aggressive policy announcements
by Shinzo Abe, before and after he became the prime minister in December 2012, calling
for more fiscal stimulus and for bold monetary easing, including a new 2 per cent
inflation target.
Other than an initial JPY10.3 trillion stimulus package, concrete actions have been
missing so far. The Yens decline is rather reflecting the expectations of capital market
players in Japan and more so abroad. Dubbed Abenomics, the new economic policies
have been outlined by the government in a very consistent and convincing way and thus
moved the markets.
The Feb. 15-16 Group of 20 meeting in Moscow confirmed that Japans economic policy
and a weaker yen are internationally accepted, at least for the time being. The final
statement did not mention any individual currency or country, though currency issues
were obviously heavily discussed among the G-20 officials.
But even if Tokyo continues to avoid international friction over its currency, a weak yen
will by far not be sufficient to restore the Japanese economy. Abenomics can only work
and succeed if all of its three elements are fulfilled: renewed fiscal stimulus, higher
inflation and still-unspecified structural reforms.
14

Retail Research

A weaker yen will help the economy by promoting net exports. Raising inflationary
expectations should also lower real interest rates in the short run, which is good.
Abe has increased the central banks target rate of inflation from 1% to 2%, in order to
enable a looser monetary policy. He is also nominating a new central bank governor more
supportive of stimulus measures. The currency markets actually began to shift in
advance, indeed even ahead of the election, in anticipation that Abe would be successful
in implementing these polices.
The latest devaluation, to around 92 per dollar, returns the exchange rate to its early2010 level. However, putting this in context, the yen had been appreciating during most
of the previous five years, strengthening from 123 to the dollar to just 76 in early 2012.
This should help Japanese exporters versus the competitiveness challenges they faced
when the yen was strong. As a result, it has led to sharp criticism from some of Japans
trading competitors such as South Korea.
Upping the fiscal deficit will also boost demand in the short run, which is helpful after
three quarters of economic contraction. Of course, old-style pork-barrel spending wont
do the trick. Deregulation and market-oriented structural reforms are indispensable.
But all of this still does not address the core of Japans economic woes: structurally weak
private-sector demand. Japans economy unexpectedly shrank last quarter as falling
exports and a business investment slump outweighed improved consumption, bolstering
Prime Minister Shinzo Abes case for more monetary stimulus to end deflation. Gross
domestic product contracted an annualized 0.4 per cent, following a revised 3.8 per cent
fall in the previous quarter. The median forecast of 32 economists surveyed by
Bloomberg News was for 0.4 per cent growth. Nominal GDP shrank 0.4 per cent on
quarter.
The prolonging of the nation's recession shows that the benefits from a weaker yen and
rising stocks are yet to be felt. Banks from Goldman Sachs Group Inc. to Nomura Holdings
Inc. have raised their growth forecasts for this year on Abes plan to revive the economy
through fiscal and monetary stimulus as central bank Governor Masaaki Shirakawa
prepares to exit next month.
Japans parliament has approved a supplemental budget of JPY13.1 trillion (US$142.43
billion) designed to finance an economic stimulus package. Despite the fact that the
governing Liberal Democratic Party lacks a majority in the upper house, lawmakers
approved the budget thanks to the votes of the LDPs coalition partner, the conservative
Buddhist New Komeito party, and other groups on the right. The DP, which governed
15

China - Economic indicators not

pointing to sustained economic
recovery

Retail Research

from 2009 to 2012, says that the stimulus package depends too much on large and
unnecessary public works projects.
Prime Minister Shinzo Abes government also hopes that this new extra budget will give a
2 per cent push to Japans GDP and create about 600,000 new jobs. To finance the
supplementary budget, the government is planning to issue new debt amounting to some
JPY7.8 trillion (US$85 billion). That, however, has sparked concerns about a worsening of
the Japanese public debt, which is already the largest in the developed world.
In recent years, while Europe and the United States economy remained in the doldrums,
China's economic growth has made increasing contribution to world economic recovery.
The Chinese market has become the safeguard for the profit growth of the global top 500
enterprises and the demand from China has become the "ballast" for global economic
growth.
Since the 2008 financial crisis, the demand from major economies has remained weak.
The sovereign debts of developed countries were constantly growing; trade and
disinvestments protectionism was clearly on the rise and the pace of world economic
recovery slowed down. During the next period of time, as the entire world economy goes
into a deep transformation adjustment, economic downturn will become the new normal
state of global economy.
Although all countries around the world are faced with weak demand and decline in
exports, China's huge demand and broad market remains one of the few bright spots in
the current world economy. Demand from China is contributing positive energy to the
world economy. In the next 5 years, the total scale of Chinas imports of goods will
exceed US$10 trillion and could provide global companies with more investment
opportunities and markets.
However, Chinas slower manufacturing casts shadow over recovery. Chinas
manufacturing in Feb is expanding at the slowest pace in four months, a private survey
showed, underscoring the headwinds faced by policy makers in the worlds secondbiggest economy. The preliminary reading of a Purchasing Managers Index was 50.4 in
February, according to a statement from HSBC Holdings Plc and Markit Economics. The
report may damp optimism that an economic rebound is gaining traction following a
seven-quarter slowdown and the weakest annual expansion in 13 years.
Despite some economic data in the recent past that showed an upside surprise, there are
numerous concerns about the sustainability of China's economy. Some of the major ones
include the excessive growth of credit over the past five years, staggering levels of
16

Indian Market Outlook

Q3FY13 Review Lowest sales
growth in last 3 years

Retail Research

overcapacity in several key industries, heavily indebted local governments, wasteful

state-owned enterprises that continue to siphon money away from savers, and the threat
of social instability if economic growth were to slow sharply.
For decades, China's economy has prospered in large part because of a massive supply of
cheap labor. Workers from rural parts of the country migrated to the cities to find
employment, mainly in manufacturing. Until recently, manufacturing wages in China
remained comparatively low, which attracted multinational corporations in droves.
Another key area of concern is clearly real estate investment. Whereas most countries
(developed and emerging) usually spent not much more than 5%-10% of GDP on real
estate fixed asset investment, in the case of China, this ratio has, over the last five
years, blown far ahead of most other economies and historic trends. In 2012, real estate
fixed asset investment accounted for 18% of Chinas GDP (or over Rmb9 trillion or US$1.5
trillion) and an acceleration path indeed started at the time of the GFC and the pace has
been broadly maintained. Whilst the contribution of public vs. private sector varies
(public sector was a larger contributor in 2H2011-1H2012) and increased spending is an
imbedded requirement of rapid urbanization; nevertheless, it does feed fears of
overcapacity and ghost towns.
India Inc had flattered only to deceive. After the early birds posted sterling numbers in
Q3FY13, it has been a story of continued deceleration in corporate earnings.
The universe of 2,314 firms compiled reported core revenue growth of 9.3%, the lowest
in at least three years and a decline of 500 bps from that reported in the September
quarter. Tepid volume growth squeezed India Incs operating margin, which declined 110
bps on a sequential basis to 16.4 per cent in the current quarter (a basis point is onehundredth of a per centage point). This is mostly due to higher employee cost, which
grew twice as fast as revenues, indicating lower capital utilisation.
Aggregate performance of BSE Sensex companies was in-line. Sensex PAT grew 7%
EBITDA grew 8%. EBITDA margins for the Sensex universe came at 18.1%. Overall EBITDA
margin declined 78 bps y-o-y (up 24 bps q-o-q) for Sensex companies. Margin pressure
was apparent in most sectors, the worst affected being auto, industrials, infra, and
metals. The big growth contributors to Sensex PAT growth in Q3 were Reliance and
ONGC. These two contribute 22% of the total earnings and grew by 22% (almost
contributing 60% of the growth). Both the earnings were much above estimates. The
highest disappointments were from Tata Steel, Bharti, Tata Motors and Hero Motocorp.
17

Service sector companies, such as private banks, IT services firms, trade and hotels and
restaurants continue to expand, with little risk of a slowdown in the near term. This has
put a floor on the earnings and economic growth
The slump in industrial and consumer demand appears to be hurting Indian corporates
where it matters the most. A little over one third of PBIT was spent on serving debt
during the December quarter. The sharp jump in interest expenses relatively is because
the slack in demand has reduced revenue generated by capacities which were added over
the past three years, largely funded by debt.
During the December quarter, select companies from a handful of sectors, including IT
and pharmaceuticals, performed well. With the growth in the domestic market being
muted for most companies, the performance of pharma companies was predominantly
driven by their show in the US market.
Far from showing any signs of revival, the engineering and capital goods sector saw a
further slide in its order book, with BHEL reporting its lowest order backlog in four years.
Capital goods was also hounded by delay in execution. Delay and deferral in decisionmaking at customers end and liquidity crunch were key reasons for weak execution. The
sectors margins further deteriorated owing to weak pricing and delay in execution. The
sector's order book declined y-o-y for third consecutive quarter (down 6% y-o-y), leading
to grimmer revenue visibility.
The divergence between PSU banks and their private sector counterparts continued in
Q3FY13 as well. PSU banks results were characterised by weak asset quality, moderating
loan growth and higher provisioning on restructured assets. Private banks, meanwhile,
showed little stress on asset quality.
Given the slowing momentum in economic growth, discretionary demand took a hit with
categories like food and certain personal products posting a slowdown; however, nondiscretionary items were impervious. Premiumisation trend continues with no major signs
of down trading and rural demand remained healthy.
The way forward:
One is not too worried about margins; one would stay glued to the demand drop. It's hard
to call a demand bottom this could undermine more positive margin trends
(profitability, pricing rationality, corporate focus on costs - Indian companies have an
inherent ability to control costs during crises). Not only are corporates cautious the
consumer is too. Its the top line thats driving down everything that represents demand
and it needs to stabilize before earnings can start moving up

Retail Research

18

Union Budget 2013-14 A let

down

Retail Research

Fixed costs like wages and interest continue to rise faster than sales, further pressuring
margins. As new capacities get commissioned, interest and depreciation costs continue to
rise, thus hurting interest coverage.
While the situation on the ground level is not that great and could worsen further before
it improves, the street looks forward to the policy measures to be announced in the
forthcoming Budget. Going by current trends, Q4 could shape up to be the worst Q4 in
atleast 3 years.
The FY14 Budget was not expected to be path breaking or populist. It was expected to be
practical or reasonable. Despite the low hopes it has disappointed on various counts.
The Budget shows no major initiative to tackle the growing current account deficit.
Despite the best efforts of the FM to avoid a ratings downgrade, this is one issue that
could undo his other good measures in the Budget.
The FM however needs to be complimented for minimal tinkering of various tax
structures.
The fiscal deficit for FY13 has been achieved by slashing plan expenditure by Rs.74,000 cr
(Communication and IT, Atomic Energy, Health and Family welfare, Home affairs, Rural
development, Steel and Railways being main heads). This was partly offset by rise in nonplan expenditure by Rs.34,000 cr (Mainly Food, Fertiliser, Economic Affairs and Fuel
subsidy). Receipts were down by Rs.60,000 cr compared to the original Budget estimates.
Hence the original fiscal deficit target of 5.1% (later raised to 5.3%) was exceeded by 10
bps to reach 5.2%.
For FY14, the FM has projected a lower growth of 10.8% in non-plan expenditure but a
higher growth in plan expenditure of 29.3%. How far is this likely to be achieved is
another question as implicit in these assumptions for non-plan expenditure are
expectations that there will be no hike in Fertiliser subsidy in FY14 vs FY13 (meaning
international fertilizer prices will be down or Rupee will be steady vs the USD), minimum
rise in Food subsidy (up 6% - despite the National Food security Bill) and Fuel subsidies
will fall 33% to Rs.67,000 cr (meaning that crude prices and USD will not strengthen and
diesel/petrol price hikes will continue as planned). It is likely that the total cost of
subsidies may exceed the government's budgeted 2% of GDP in fiscal 2013-2014,
compared with 2.6% in the current year.
Measures for kickstarting capex spending and removing bottlenecks in infrastructure and
mining space have been at best weak. While the reintroduction of investment allowance
is welcome, one will also have to keep in mind the overcapacity faced by most industries,
19

Fiscal Deficit Target of 4.8 per cent

Achievable?

Retail Research

land acquisition issues, power problems and possibility of further NPAs for Banks going
forward due to this asset based tax incentive.
Corporate profitability could get impacted a bit by hike in surcharge.
Inflation could remain high due to the fact that service tax collections have been
estimated to rise 36% to Rs.1,80,141 cr (a jump of Rs.47,000 cr). Rail and road transport
could be one of the contributors. Further freight hikes due to the latest Rail Budget and
diesel price hikes could also keep inflation at higher than comfortable levels.
While one appreciates that a lot of action could happen out of the Budget and every
demand is not possible to be addressed in this event, the FM could have excited the
Indian public and the foreign investors by being a little more bold, radical and out of the
way. This could have revived the business sentiments more than the individual measures
that could be taken in a staggered manner later during the year. Given the current
political climate and the economic conditions, one doubts about the extent to which
reforms can be carried out outside of the Budget ahead of the forthcoming elections.
The Finance Minister may have tried his best to arrest the widening fiscal deficit in the
Budget 2013-14, but the risk of slippage in 2013-14 fiscal deficit still continues. While the
finance minister has pegged 2013-14 fiscal deficit at 4.8 per cent, the actual fiscal deficit
could come in higher.
Indias fiscal deficit (Centre and States taken together) of 8-9 per cent of the GDP is high
by any standard. It far exceeds all other BRIC nations China (1 per cent), Brazil (2.9 per
cent) or Russia (1 per cent). The combined fiscal deficit of the States stands at 2.5 per
cent of Indias GDP, which is well below the limits set by the Thirteenth Finance
Commission. Clearly, the Centre seems to be more responsible for Indias fiscal mess.
Indian rupee remains under pressure because of high current account deficit in the range
of 4 per cent of GDP caused mainly by import of crude and gold. To maintain overall
balance on external account, India needs FII and FDI inflows equivalent to 4 per cent of
its GDP. Of the two, FII is highly volatile and its net inflow depends on expected riskweighted return in equity markets. FDI inflows, on the other hand, depend upon the
overall attractiveness of India as an investment destination of which macroeconomic
stability is a key determinant and maintaining fiscal deficit at low levels, a key
component of that.
Inflation in India is primarily a supply-side problem and needs supply-side solutions. Fiscal
deficit (because of rising subsidy), by crowding out private investment, only adds to the
20

supply constraints. Subsidy, at the most, is a temporary solution with many negative side
effects, fiscal deficit being just one of them.
Market to trade in the 18,20019,400 range on the Sensex over
this month

The worrisome fact is that India has seen good growth over a period of 5 years post 2008.
In spite of reasonable growth, the performance of stock market has been very
disappointing. This has resulted in small and midcaps underperforming severely in the
past few weeks with retailers exiting these even at a loss. Bringing the retail interest
back in the stock markets is a Herculean task given the recent experience.
Indian markets could underperform in the near term affected by local factors and global
events one after the other. Till the general elections are announced (in early 2014 if on
schedule), speculative buildup in the markets is likely to be subdued and hence the
upside momentum even in bounces could be weak. The macro situation in India could
take a few quarters to get corrected, even as the micro situation throws up sharp
differences in the ability of corporates to withstand difficult times. Highly leveraged
companies and companies without pricing power could continue to get derated.
Continued FII interest in largecaps could arrest any large fall in the mainline indices.
Even as other countries face different challenges in the near term, India despite its often
repeated problems could still get a fair share of emerging market inflows.
We expect the Sensex to be in the range of 18,200 to 19,400 over this month.

Technical Commentary:

Retail Research

21

Retail Research

The Sensex breached the trend line, which was in effect for last 8 months and according
to the theory of breaching of the trendline if we examine the validity of this breach than
this breach is valid. We have used time filter as well as price filter to check the validity
of this breach.
At the same time we had used various tools which are as follows: 1) Violence
2) Point of acceleration.
3) Western Gap Down
4) Large black Candle.
5) Lower Top and Lower Bottom Formation.
6) Non filling of the gap after 6 trading sessions.
And all the above-mentioned tolls are suggesting that the bearish trend has begun as the
wave 5 had ended at 19,742.

We have given Neowave count on the chart above, according to it the wave 5 must have
ended at the lower top of 19.742.
As we have marked on the chart above there is an Ovelap between wave 4 and wave 2
and that is the technical reason we are labelling wave 5 as a terminal impulse. It has
22

Retail Research

taken 64 trading sessions and in last 6 trading sessions, it had been retraced 63% of the
previous upmove. Now the first downward target is given in the chart below.
According to the Neowave theory the entire terminal impulse which took 64 trading
sessions must be retraced in next 16 trading sessions which is 25% time taken by the
entire terminal and the maximum time allowed is 32 trading sessions.
Out of this 16 trading sessions, 6 trading sessions are already over and we have 10 more
trading sessions to achieve the first target, which is at 18,256.
If we take retracement theory into account we get almost the same target, which is
explained in the chart below.

Now as the wave D of the contracting trangle is over a new wave E has opened in the
downward direction. Now if we take 38.2% of the entire wave D from 15,749 to 19,742
it comes to 18,215 which will be the first downward target of wave E in coming days.
23

The month gone by:

For the month of February 2013, the Sensex opened at 19,907 made an intra day high at
19,967 which was also the high for the month.
For the next 6 trading sessions it came down continuously and finally made an
intermediate bottom at 19,415. For the next 8 trading sessions, it went into a sideways
phase. On 2 occasions it made highs of 19,723 and 19,742 but it could go much higher
than that which resulted in to a gap down action on 21st February 2013.
The Sensex formed a Western Gap Down between 19,620 to 19,555 and after 5 trading
sessions this gap remained unfilled which is a bearish indication.

Learning Technical Analysis

How To Develop A Trading Brain

Retail Research

Tradingpsychologie" is a book on trading psychology that was published in Germany in

2012 and was received with great enthusiasm. Many readers and reviewers commented
that it was the best book on the subject that they had ever read or that it was the first,
which was of any real use. The book's author, Norman Welz, is a psychologist and
journalist who developed a keen interest in the stock market and the associated
psychology. His specialty is trading psychology, a subject on which he has not only
extensive experience but also some unique insights. Among other things, he trains traders
to develop their brains in the right direction.
24

It Is Truly All in the Mind

Why Do Traders
Psychology?

Retail Research

Neglect

Welz stresses that what differentiates both his work and his book from the vast literature
in the field is the emphasis on applied trading psychology. It is common knowledge that
traders need discipline, but accepting this idea is simply not enough to enable investors
to operate in the appropriate manner.
The essence of the problem is that most people like and need security in all its forms,
but "trading is the most insecure business you can be in," Welz says. He argues that no
other profession creates so many and such intense emotions and reflects so much of our
personalities. He goes so far as to state that stock market activities personify money: "we
don't just trade assets and money, we become the money," according to Welz.
To trade effectively, the right mindset is essential. Yet, nothing is harder than divorcing
ourselves from the multitude of factors that have created our mindsets in the first place
and that dictate how our brains function. We are influenced by parents, family, friends,
the environment, society, the media, books and more. By the time we start trading, all
of these influences tend to fix trading patterns that are often dysfunctional or
suboptimal. Trying to change these patterns is somewhere between difficult and
frightening.
In order to understand Welz's approach, it is necessary to understand the pervasive role
of psychology and the brain. While the notion that psychology is vital to the stock market
is nothing new, Welz believes that trading is literally 100% psychology. Without a psyche,
we could never evaluate financial risk or recognize trends. "No brain, no stock market
trading," says Welz. Mental strength is thus absolutely fundamental to trading success.
Furthermore, about 95% of our actions are subconscious, and we tend to replicate our
behaviors over and over again. All too often, this replication means repeating the wrong
or even disastrous courses of action.
To support this contention, Welz refers to a study in which 120 traders were given a
system that had proved its intrinsic value statistically in 19 of the last 20 years. After a
test year, it was evident that 119 of these traders failed with the system because their
mental tendencies led them astray. All but one trader had the wrong mental processes.
"Success comes from the head," Welz says. The system was good, but the attitudes and
psychology with which the traders applied that system were not..
Most traders are men, who tend to think that psychology is not what really matters. They
think that what matters, rather, are simplistic notions of being coldly rational, well
informed and experienced. According to Welz, however, rationality, information and
25

experience don't help if the brain is not appropriately programmed and tuned. So what
can we do to get our minds and subconscious to act appropriately?
Welz's Approach

Retail Research

Norman Welz works on the brains of traders through the subconscious and hypnosis.
Trainees are put into a trusting mood and the necessary competences are anchored in
subconscious regions of the brain. If this process sounds a bit weird, consider this: For
many years, Welz has helped people overcome their fears and blockages, enabling them
to win sporting championships and even to secure an Olympic victory. Furthermore, he
has helped traders to earn money through activating the right mental energy, motivation
and, thus, behavior. He stresses that each person has unique mental bridges and barriers
that need to be crossed or overcome in order to ensure success.
"Trading discipline" comes from modifying one's behavior in a desired direction and
overcoming the mental resistance and fear that generally get in the way. Particularly in
the context of trading, Welz believes that "there are armies of resistance." The trading
brain in fact entails an integration of the right investment and market knowledge with
the right mental capabilities. It is not that the usual skills are unimportant, it is just that
they usually get overridden by the wrong mental and behavioral patterns.
Effective trading thus involves personality modification. According to Welz, "people who
are not willing to attempt this should not even bother with trading." Those who
concentrate only on the so-called logical aspects of charts and trends, including all those
patterns like "flags, triangles and channels or stops and trading ranges," will ultimately
flounder on the myriad of emotions that inevitably come into play and even dominate the
markets.
The above, explains Welz, is "the ultra-short version" of his theory, but indeed the
essence of the matter. Furthermore, he believes that anyone can become a trader and
overcome his or her fears. Provided that people are not clinically ill, they can resolve
those fundamental anxieties if they are truly willing to work on themselves. In addition,
they need a good sense of and grip on reality if success is to result. Of course, financial
knowledge and skills, information and research all still play key roles.
However, it is hard work getting there. Welz believes that people shouldn't think they
can "start with a mini-account and live from their earnings as a professional trader within
six months." It takes time and dedication. Welz believes that if this weren't the case, the
roads would be full of Ferraris and Porsches.

26

The Bottom Line

The fundamental role of trader psychology tends to be underestimated and too much
emphasis placed on the technical side. While both are essential, it is arguably the right
mindset that differentiates successful from unsuccessful traders. However, learning the
technical aspects of trading is more straightforward than acquiring a top-notch trading
brain. The latter generally entails working intensely on one's own personality traits and
eradicating entrenched behavioral patterns. This process is not easy and requires
dedication, time, and often, the aid of a skilled coach. Nevertheless, the results are very
likely to reap dividends.

The month of Feb 2013 saw the markets sliding lower. The downside acceleration
increased once the 5823 lows were broken on 26th Feb and further increased on 28th
Feb, which was the Budget day. M-o-M, the Nifty lost 5.66%.
FIIs were reported as net buyers of Rs. 13,032 cr in Feb 2013 (In Jan, they were net
buyers of Rs. 21,618 cr). In the F&O space, the FIIs were net sellers in the Index Futures
segment. Along with the increase in the open interest, it indicates short positions were
undertaken by FIIs in index futures segment. In the index Options segment, the FIIs were
net buyers, which was accompanied with an increase in the open interest. In the Stock
Futures segment, FIIs were net buyers, while open interest decreased over Jan. The
Stock options segment reported low participation during the month of Feb.

Derivatives Commentary:

Retail Research

27

The March 2013 series has started on a lighter note compared to the previous series. In
terms of value, the March 2013 series has begun with market wide OI at Rs.90,348crs. Vs.
Rs.92,594crs. at the beginning of the Feb 2013 series. It was Rs.93,733crs. at the
beginning of the Jan 2013 series. The lower participation levels in the March series
(compared to the previous series) indicate that traders are probably being more cautious.
Rollovers to the March series too were lower compared to the previous series. While Nifty
rollovers were at 54% Vs. 64% during the same time in the previous series, Market wide
rollovers were at 80% Vs. 84% the same time in the previous series. The lower rollover
figures again indicate that traders were being cautious probably due to the weakness
seen in the markets in February.
Coming to stock specific rollovers, highest rollovers were seen in McDowell, Bata India,
McLeod Russell and Bharat Forge. The lowest rollovers were seen in Shriram transport,
ITC, HDFC Bank and Bharti Airtel.
Reflecting the downtrend in the markets in Feb, the Nifty OI PCR slid to 0.97 from 1.08
levels at the beginning of the Feb series. Reflecting the lack of volatility in the markets,
the Nifty IV climbed marginally to 13.49% (at the beginning of the March series) from
13.0% the same time in the previous series.
Technically, the Nifty remains in a downtrend after breaking the 5823 lows in late Feb
2013. Immediate downside targets for the Nifty are at 5649, which coincides with the
200-day EMA. Further downside targets are seen at 5600-5550, once 5649 levels are
broken. Any rallies could find resistance at 5766-5775.
Index option activity too is suggesting this as the maximum Call OI is currently being seen
in the 5900-6000 strikes indicating this is the maximum upside for the Nifty in the near
term.
In the put segment, maximum OI is currently being seen in the 5700-5600 puts,
suggesting this is the maximum risk on the downside for the near term. So, it seems that
market participants expect the Nifty to trade within the 5600-6000 levels.

Learning Derivatives Analysis

Margins

Retail Research

Participants in a futures contract are required to post performance bond margins in order
to open and maintain a futures position.
Futures margin rates are set by the futures exchanges and some brokerages will add an
extra premium to the exchange minimum rate in order to lower their risk exposure.
28

Initial Margin

Mark to Market margin

Margin Calls

Retail Research

Margin is set based on risk. The larger rupee value moves that a futures market makes,
you can expect higher margin rates.
Futures margin requirements are set by the exchanges and are typically 6 to 20 percent
of the full value of the futures contract in a normal scenario.
Margins are financial guarantees required of both buyers and sellers of futures contracts
to ensure that they fulfill their futures contract obligations.
Initial Futures Margin is the amount of money that is required to open a buy or sell
position on a futures contract.
Before a futures position can be opened, there must be enough available balance in the
futures trader's margin account to meet the initial margin requirement. Upon opening the
futures position, an amount equal to the initial margin requirement will be deducted
from the trader's margin account and transferred to the exchange's clearing firm. This
money is held by the exchange-clearing house as long as the futures position remains
open.
Margin Maintenance is the amount of money where a loss on your futures position
requires you to allocate more funds to bring the margin back to the initial margin level.
The mark to market margin (MTM) is collected from the member before the start of the
trading of the next day.
The MTM margin is collected/adjusted from/against the cash/cash equivalent component
of the liquid net worth deposited with the Exchange.
The MTM margin is collected on the gross open position of the member. The gross open
position for this purpose means the gross of all net positions across all the clients of a
member including its proprietary position. For this purpose, the position of a client is
netted across its various securities and the positions of all the clients of a member are
grossed.
There is no netting off of the positions and setoff against MTM profits across two rolling
settlements i.e. T day and T+1 day. However, for computation of MTM profits/losses for
the day, netting or setoff against MTM profits is permitted.
A margin call on futures contracts is triggered when the value of your account drops
below the maintenance level.

29

Example

You hold five futures contracts that have an initial margin of Rs. 10,00,000 and a
maintenance margin of Rs. 7,00,000. The value of your account falls to Rs.6,50,000. You
will get a margin call requiring you to add Rs.3,50,000 to your account to bring it back to
the initial margin. You also have the option of closing your positions to eliminate the
margin call.

How to Calculate Futures Margin

Futures margin rates are typically calculated using a program called SPAN. This program
measures many variables to come up with a final figure for initial and maintenance
margin in each futures market. The main variable is based on the volatility of each
futures market. The exchanges do adjust their margin requirements occasionally based
on market conditions.

Example

Trader buys 1 Nifty futures contract at 6000. Nifty Lot size = 50. The next day Nifty
Futures go down and closes at 5970. Thus, Traders gets a margin call and thus has to pay
30*50 =Rs.1500 as a mark-to-market margin. On the other hand, if the Nifty futures rises
the next day and closes at 6050 then the client gets the excess amount credited to his
account. In this case the amount credited would be 50*50 =Rs.2500

Extract of Calls during February 2013

Index Futures Calls
Date

B/S Trading Call

Bank Nifty Feb Fut

Entry at

Sloss

Targets

Exit Price / CMP

11909-11970

11980

11790

11855.1

Exit Date % G/L Comments

41332.0

2.0 Premature Profit Booked

Time Horizon

Avg. Entry

Abs.
Gain/Loss

3-5 days

12097.5

242.4

27-Feb-13

25-Feb-13

B Bank Nifty Fut

12035-12095

12030

12205

11988.0

41330.0

-0.6 Premature Exit

2-3 days

12058.5

-70.5

19-Feb-13

Nifty Fut

5891-5900

5920

5830

5920.0

41324.0

-0.4 Stop Loss Triggered

1-3 days

5895.5

-24.5

8-Feb-13

Nifty Fut

5937-5945

5966

5870

5918.0

41317.0

0.3 Premature Profit Booked

1-3 days

5937.4

19.4

5-Feb-13

Bank Nifty Feb Fut

12535-12595

12605

12400

12485.0

41310.0

0.5 Premature Profit Booked

3-5 days

12542.5

57.5

1-Feb-13

Bank Nifty Fut

12705-12760

12770

12570

12655.0

41306.0

0.5 Premature Profit Booked

3-5 days

12717

62

Entry at

Sloss

Targets

Exit Price / CMP

Time Horizon

Avg. Entry

Abs.
Gain/Loss

Stock and Nifty Options Calls

Date

B/S Trading Call

28-Feb-13

B Nifty 5700 Put Option

27-Feb-13

B ONGC Feb 300 Put Option

Retail Research

Exit Date % G/L Comments

45.5-30

27

85

67.4

41333.0

53.5 Premature Profit Booked

3-5 days

43.9

23.5

1.25-0.85

0.75

2.5

2.5

41332.0

92.3 Target Achieved

3-5 days

1.3

1.2

30

27-Feb-13

B RCOM 70 Call Option

0.4-0.9

0.3

1.6

41332.0 146.2 Premature Profit Booked

26-Feb-13

B HUL 460 Call Option

3.1-2.5

5.1

41331.0

22-Feb-13

B Tata Power 95 Put Option

19-Feb-13

B Reliance Capital 400 Put Option

15-Feb-13

B Nifty 5800 Put Option

11-Feb-13

B IDFC 160 Put Option

7-Feb-13

B TCS 1400 Call Option

6-Feb-13

B Opto Circuit 70 Call Option

4-Feb-13

B Nifty Feb 6000 Put Option

4-Feb-13

B Maruti 1550 Put Option

1-Feb-13

B Tata Motors 280 Put Option

1-2 days

0.65

0.95

68.3 Premature Profit Booked

2 days

2.05

78.6 Premature Profit Booked

3-5 days

0.7

0.55

3-5 days

11.17

-3.92

0.7-0.5

0.4

1.5

1.3

41327.0

11.65-8.5

7.25

22

7.3

41324.0

-35.1 Stop Loss Triggered

33.7-25

23

60

23.0

41320.0

-31.3 Stop Loss Triggered

3 days

33.5

-10.5

4.7-4

6.4

41316.0

36.2 Premature Profit Booked

3-5 days

4.7

1.7

15.85-12

10

30

24.0

41313.0

52.8 Premature Profit Booked

3-5 days

15.67

8.28

3.4-2

10

6.8

41311.0 100.0 Premature Profit Booked

10 days

3.4

3.4

67.2-55

50

90

82.3

41309.0

15-24

14

50

14.0

41311.0

5.45-4

3.2

11

9.6

41306.0

Entry at

Sloss

Targets

Exit Price / CMP

71.70-73.50

74.5

66

69.4

41333.0

26.5 Premature Profit Booked

3 days

65

17.25

2-3 days

22.1

-8.15

3-5 days

5.37

4.23

Time Horizon

Avg. Entry

Abs.
Gain/Loss

3.3 Premature Profit Booked

3-5 days

71.7

2.3

3.9 Premature Profit Booked

3-5 days

72.6

2.8

3-5 days

212

-6

2-5 days

794.15

17.15

2-3 days

18.05

-0.65

-36.9 Stop Loss Triggered

78.8 Premature Profit Booked

Trading/BTST/Futures Calls
Date

B/S Trading Call

JP Associates March Fut

Exit Date % G/L Comments

28-Feb-13

22-Feb-13

B Shiv Vani Oil

73.2-71

70.25

79

75.4

41330.0

22-Feb-13

B STC India

215-209

206

235

206.0

41330.0

21-Feb-13

20-Feb-13

B Mercator

JSW Steel Fut

18-Feb-13

B HDIL

69.6-68

67

75

72.5

41325.0

15-Feb-13

Shriram Transport Finance Fut

715-735

736

685

736.0

41320.0

14-Feb-13

Adani Ports Feb Fut

153.8-156

159.5

143

151.5

41319.0

13-Feb-13

B Indiabulls Finance

282-275

270

300

270.0

41319.0

12-Feb-13

72.8-74

75.5

67

70.0

41317.0

12-Feb-13

B Kolte Patil

95-100

101.2

110

107.2

7-Feb-13

B ARSS Infra

44.2-43

42.3

48.5

44.7

6-Feb-13

B Hexaware

77.35-75.5

79.55

84

80.0

41312.0

4-Feb-13

B FKonco

108-106

104

115

104.0

41310.0

1-Feb-13

B Essar Oil

89.2-87

92.25

98

92.7

41306.0

Entry at

Sloss

Targets

Exit Price / CMP

IB Real Estate Fut

793-805

815

743

777.0

41326.0

16.8-18.2

16.5

20.5

17.4

41330.0

-2.8 Stop Loss Triggered

2.2 Premature Profit Booked
-3.6 Premature Exit
4.6 Premature Profit Booked

3-5 days

69.3

3.2

2-3 days

725.5

-10.5

3-5 days

154.37

2.87

3 days

283

-13

4.0 Premature Profit Booked

2-5 days

72.8

2.8

41318.0

8.6 Premature Profit Booked

2-3 days

98.75

8.45

41313.0

1.9 Premature Profit Booked

3-5 days

43.85

0.85

3.4 Premature Profit Booked

3-5 days

77.35

2.65

3 days

108

-4

3-5 days

88.85

3.8

-1.4 Stop Loss Triggered

1.9 Premature Profit Booked
-4.6 Stop Loss Triggered

-3.7 Stop Loss Triggered

4.3 Premature Profit Booked

Positional Calls
Date

B/S Trading Call

Retail Research

Exit Date % G/L Comments

Time Horizon

Avg. Entry

Abs.
Gain/Loss

31

13-Feb-13

B Tata Coffee

4-Feb-13

1477-1511

1476.0

1610.0

1548.0

21-Feb-13

3.4 Premature Profit Booked

2-3 days

1497.0

51.0

33.95-35

35.4

31.5

32.7

7-Feb-13

3.8 Premature Profit Booked

5-7 days

34.0

1.3

IVRCL Infra Feb Fut

Gainers & Losers February 2013

Top Gainers From F&O
Price

Top Losers From F&O

Price

Price

31-Jan-13 28-Feb-13 % Chg

TCS

1344.15

1517.00 12.86

SUNPHARMA

718.00

802.15 11.72

HEXAWARE

78.90

86.35

TECHM

998.95

HCLTECH

Top Gainers From CNX 500

Top Losers From CNX 500

Price

Price

Price

31-Jan-13 28-Feb-13 % Chg

31-Jan-13 28-Feb-13 % Chg

100.50

58.35 -41.94

VENKEYS

OPTOCIRCUI

79.40

50.05 -36.96

9.44

SUZLON

24.55

16.00 -34.83

1051.05

5.22

PANTALOONR

248.20

176.20 -29.01

688.00

723.40

5.15

ADANIPOWER

61.00

INFY

2789.50

2907.00

4.21

UNITECH

IDEA

112.95

117.60

4.12

RCOM

BHUSANSTL
MCDOWELL-N
EXIDEIND

WELCORP

Price

416.65

484.75 16.34

BLUEDART

2011.30

TCS

Price

31-Jan-13 28-Feb-13 % Chg

COREEDUTEC

300.55

55.15 -81.65

2288.85 13.80

DBREALTY

136.65

70.80 -48.19

1344.15

1517.00 12.86

TULIP

19.00

9.90 -47.89

SUNPHARMA

718.00

802.15 11.72

HINDOILEXP

102.75

58.00 -43.55

44.45 -27.13

CONCOR

934.70

1038.00 11.05

WELCORP

100.50

58.35 -41.94

36.85

27.20 -26.19

FINPIPE

78.80

86.95 10.34

UBHOLDINGS

82.95

49.45 -40.39

82.70

61.05 -26.18

HEXAWARE

78.90

86.35

9.44

UTTAMSTL

115.70

70.30 -39.24

449.10

461.10

2.67

IVRCLINFRA

34.40

25.60 -25.58

BERGEPAINT

173.90

189.80

9.14

OPTOCIRCUI

79.40

50.05 -36.96

1804.40

1840.10

1.98

FINANTECH

1120.90

843.95 -24.71

MINDTREE

788.70

860.20

9.07

DISHMAN

108.85

69.05 -36.56

122.80

125.10

1.87

UCOBANK

75.85

57.15 -24.65

CHOLAFIN

283.85

306.10

7.84

EDUCOMP

128.05

83.10 -35.10

RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office
HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves,
Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Website: www.hdfcsec.com
Email: hdfcsecretailresearch@hdfcsec.com
Disclaimer: This document has been prepared by HDFC securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made
available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent
that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time
solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for non-Institutional Clients only.

Retail Research

32