higher for target of 11700… - icici...

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December 13, 2017 ICICI Securities Ltd. | Retail Equity Research 1

Research Analyst

Amit Gupta [email protected] Azeem Ahmad [email protected]

Raj Deepak Singh [email protected] Nandish Patel [email protected]

Rational exuberance to drive Nifty

higher for target of 11700…

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-2.5

-2

-1.5

-1

-0.5

0

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1

1.5

2

2.5

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

Dec

-16

Mar

-17

Jun

-17

Dec

-17

Mar

-18

Jun

-18

Oct

-18

Fed

Fu

nd

rate

Re

turn

s (i

n B

Ps

in B

on

ds

& %

fo

r o

the

rs)

Rate hike months

US 2 year US 10 Year Gold

S&P Index Fed Rate

80

100

120

45

50

55

60

65

De

c-15

Feb

-16

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct

-16

De

c-16

Feb

-17

Ap

r-1

7

Jun

-17

Au

g-1

7

Oct

-17

Co

nsu

mer

Co

nfi

den

ce

PM

I Ma

nu

fact

urin

g/C

omp

osit

e PMI Manufacturing PMI Services

80

90

100

110

120

130

45

50

55

60

65

Dec

-15

Feb

-16

Ap

r-16

Jun

-16

Au

g-16

Oct

-16

Dec

-16

Feb

-17

Ap

r-17

Jun

-17

Au

g-17

Oct

-17

Co

nsu

me

r Co

nfid

ence

PM

I Ma

nu

fact

urin

g/C

omp

osit

e PMI Manufacturing PMI Services Consumer Confidence

Since first rate hike by Fed in Dec 2015, US equites continue

to clock strong returns, drawing incremental share of flow


Source: Bloomberg, ICICIdirect.com Research

Equity continues to outperform since start of rate hike cycle in US

Sentiment continues to improve at corporate, individual

level in US

Easy financial conditions, subdued volatility to aid further

upsides

Contraction

Expansion Tight financial con

Easy Financial Con

Since the commencement

of rate hike by the US Fed

in 2015, equity markets

have constantly

outperformed other key

asset classes like gold and

bonds. This has triggered

strong inflows into equites

at the expense of other

key asset classes like bond

and gold

S&P is likely to clock strong

positive returns in 2018, as

the Fed is expected to deliver

two or three rate hikes in

2018, which is likely to keep

the underperformance trend

of bonds, gold intact (caveat

being deflation shock)

Easy financial conditions

coupled with subdued

volatility and robust

sentiment from corporates,

individuals to continue to

thrust US equities higher

Forecast

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Year Standard Deviation Return

2015 4% 0%

2016 3% 10%

2017 1.5% 17%

Year Standard Deviation Return

2015 4% -3%

2016 5% 4%

2017 3% 24%

2018 1.5% 17%

Indian markets following S&P: What happened in S&P in

2016 started in Nifty from 2017

December 13, 2017 ICICI Securities Ltd. | Retail Equity Research 3Source: Bloomberg, ICICIdirect.com Research

Standard deviation of S&P returns started declining in 2016

Standard deviation of Nifty returns starts declining in 2017

Hence, Nifty projection for 2018: 11700

Trend of declines getting smaller seen in S&P since 2016

Limited decline trend also seen in Nifty since 2017

The decline in standard deviation (SD) of S&P returns was seen in 2016 when SD declined from 4% to 3%. In the Nifty, it was seen in

2017 when SD of Nifty returns fell from 5% to 3%. We believe 2018 would be the year in which SD of Nifty returns could witness a further

decline from 3% to 1.5% following S&P pattern. Hence, we believe the Nifty should be able to post near 17% return in the coming year

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Ma

r-1

5

Apr

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May

-15

Jun-

15

Jul-

15

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb

-16

Ma

r-1

6

Apr

-16

Ma

y-1

6

Jun-

16

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

Nov

-16

Dec

-16

Jan-

17

Feb

-17

Ma

r-1

7

Apr

-17

Ma

y-1

7

Jun-

17

Jul-

17

Au

g-1

7

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-17

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Nov

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Dec

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1

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-8% -7% -5% -4% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8%

No

of

Mo

nth

sSteady inflows have led to Nifty following

Uniform distribution pattern

Nifty monthly returns have been forming uniform distribution

pattern – an indication of steady flows

December 13, 2017 ICICI Securities Ltd. | Retail Equity Research4

• The Nifty returns have been

within -1-4% range. The

extreme cases of large losses

or gains have remained

limited. This shows the

steadiness of returns where

the Nifty returns pattern has

formed uniformly distributed

pattern

Nifty returns uniformly distributed

No more than 2 negative monthly closings

Frequency of Nifty monthly returns have been mainly within -1-4%

• The Nifty has been unable to close

negative on a monthly basis for

three consecutive months despite

any negative event due to this

persistent inflow

Nifty monthly performance – Bounce seen after two consecutive negative monthly closing


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Writing positions formed in 10000 Put of December 2017 and

9700 Put of June 2018 in middle of 2017


EM Currency basket strength justified 10000 Put of December 2017

• Even when the market was jittery and

saw a correction from 10200 to 9700

in the middle of 2017, action was

taking place in 10000 Put of December

and 9700 Put of June 2018. These

strikes were getting written, which

signals towards strong support near

these levels

• Nifty 10000 Put writing suggests the

Nifty may try to form a base near

10000 and have an upward trajectory

Nifty writing seen at 10000 Put

10000 Put is shorted at 400 points of premium – indicating strong support at 9600

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June 2018, 9700 Put writing further strengthens view of

strong support near these levels


EM Currency basket strength justified 9700 Put of June 2018

• The action happened not only in 2017

Put strike but also in June 2018 Put

strike where premiums were shorted

in anticipation of limited downsides in

the market

• The 9700 Put of June 2018 is still

witnessing writing. This also started

when the Nifty was near 9700. This

strengthens the view that strong

support for the market is close to

these levels

9700 Put of June 2018 also seeing

writing

9700 Put of June 2018 is also shorted, which signifies support near these levels in the coming year

Pri

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45

India S&P DAX Korea Taiwan

% R

etu

rn

2015 2016 2017

Liquidity likely to remain benign in 2018: Despite US Fed

unwind, ECB, BoJ continues with QE


• While the US Fed has started its

unwinding of balance sheet, ECB

and BoJ are likely to continue with

their QE programme

• Together, they will continue to

push US$100 billion of QE till June

2018. Even after this, BoJ is likely

to continue with its US$60 billion

QE run rate. Hence, the central

bank liquidity picture is likely to

remain positive in 2018

• A positive liquidity environment

bodes well for risk assets like

equities

ECB & BoJ to continue on QE path Despite US Fed unwind, ECB, BoJ continue on QE path in H1 of 2018

0

20

40

60

80

100

120

140

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-17

No

v-17

Dec

-17

Jan-

18

Feb

-18

Mar

-18

Ap

r-18

May

-18

Jun

-18

Jul-

18

Au

g-18

Sep

-18

Oct

-18

No

v-18

Dec

-18

Jan-

19

Feb

-19

Mar

-19

Ap

r-19

May

-19

Jun

-19

Jul-

19

Au

g-19

Sep

-19

Oct

-19

In U

S $

Bil

lio

n

BoJ ECB

Consistent liquidity flows lead to gradual equity rise across markets

All the markets have got synchronised on account of persistent flows, which are expected to

continue in 2018

Gradual upsides seen in equity markets

• The chart on the left side depicts

total upsides-Total downsides in

various equity markets. It shows

how this difference is increasing

eventually in favour of rising

markets


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-13

Aug

-13

Nov

-13

Feb

-14

May

-14

Aug

-14

Nov

-14

Feb

-15

May

-15

Aug

-15

Nov

-15

Feb

-16

May

-16

Aug

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Nov

-16

Feb

-17

May

-17

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-17

Indi

a VI

X

EM &

G7

Vola

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EM Vol G-7 Vol India Vol

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100

120

140

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-97

Oct

-98

Au

g-99

Jun

-00

Ap

r-01

Feb

-02

Dec

-02

Oct

-03

Au

g-04

Jun

-05

Ap

r-06

Feb

-07

Dec

-07

Oct

-08

Au

g-09

Jun

-10

Ap

r-11

Feb

-12

Dec

-12

Oct

-13

Au

g-14

Jun

-15

Ap

r-16

Feb

-17

In U

S $

Bil

lio

n

Developed markets continue to see flows in equities


Equity ETF in US clocked record inflowUS equity ETF has seen inflows at strongest pace ….

• ETFs in US have outgrown actively

managed MFs. On a consolidated

basis, strong inflow is seen in equity

ETF

• As per the latest data for 2017, equity

based ETFs have received almost

double the record inflows seen in 2016

• This suggests preference for equity

remains

Globally volatility on declining trend not only in developed market but also in EMs

• Cross asset volatility is likely to

remain low. In equity markets more

specifically, volatility has been moving

in sync not only for India and EMs but

also the developed markets

• With chances of any major risk shock

remaining benign, volatility across

equity markets is likely to remain low

Volatility to remain lower in equities

ETF flows in the US are continuously rising and are seen at a 20-year high in the

latter part of 2017


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-1,500

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0

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2,000

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-07

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r-08

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g-08

Dec

-08

Ap

r-09

Au

g-09

Dec

-09

Ap

r-10

Au

g-10

Dec

-10

Ap

r-11

Au

g-11

Dec

-11

Ap

r-12

Au

g-12

Dec

-12

Ap

r-13

Au

g-13

Dec

-13

Ap

r-14

Au

g-14

Dec

-14

Ap

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Au

g-15

Dec

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g-16

Dec

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Au

g-17

In U

S $

mil

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n

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-1000

0

1000

2000

3000

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r-13

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Au

g-13

Oct

-13

Dec

-13

Feb

-14

Ap

r-14

Jun

-14

Au

g-14

Oct

-14

Dec

-14

Feb

-15

Ap

r-15

Jun

-15

Au

g-15

Oct

-15

Dec

-15

Feb

-16

Ap

r-16

Jun

-16

Au

g-16

Oct

-16

Dec

-16

Feb

-17

Ap

r-17

Jun

-17

Au

g-17

Oct

-17

In U

S $

mil

lio

n

Emerging markets: Equities continue to attract fund flows

with outflows seen from bonds in H2 2017


Bond market flows taking a breather

Largest EM ETF has seen strong inflows

• At the start of the year, as the reflation

trade eased, EM bonds saw strong

buying interest in H1 of 2017.

However, in H2 of 2017, as growth

picked up pace in most Ems, the

inflows in bonds tapered off

• Additionally, the decidedly hawkish

centrals banks of the US & Europe

kept yields higher. This reduced the

spread between developed markets

and EMs. As a result, the alpha from

EM bond portfolio has reduced

• FIIs are using the equity route for EMs

as GDP growth and EPS expansion

remains intact for most EMs

• Hence, in 2018, EM equites should

continue to see strong inflows even if

bond market inflows remain subdued

Contrastingly, bond market ETF has seen outflows since September, 2017

EM equites continue to be strong

• EMs backed by strong macro

environment of strong growth and

lower inflation have kept FIIs glued to

buying into the EM equity class

• Asian EMs have particularly performed

well, with returns exceeding 20% for

most

• With GDP, EPS growth continuing in

most EMs, FII interest in EM is likely

to continue in 2018. This provides

imputes for EMs to move higher


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-15%

-10%

-5%

0%

5%

10%

15%

20%

Cze

ch

Re

pu

bli

c

Pol

and

Eu

rop

e

Bu

lga

ria

De

nm

ark

Hun

gary

So

uth

Ko

rea

Th

ail

an

d

Ma

lay

sia

Ro

ma

nia

Isra

el

Me

xic

o

Taiw

an

Sw

ed

en

Sin

ga

po

re

Ind

ia

Ch

ina

Can

ada

Pe

ru

Sw

itze

rla

nd

No

rwa

y

Jap

an

Ru

ssi

a

Ch

ile

Ne

wze

lan

d

So

uth

Afr

ica

Co

lam

bia

Ind

on

es

ia

Ho

ng

Ko

ng

Ph

ilip

pin

es

Bra

zil

Au

stra

lia

Arg

en

tin

a

UK

Tu

rke

y

Cu

rre

nc

y R

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(%)

0

5

10

15

20

25

30

S&P DAX Nifty Hangseng Taiwan

Size

of

Co

rrec

tio

n (%

)

2015 2016 2017

Strong liquidity induced strength in most currency pairs…


EM Currency basket strength justified All major currency pairs have strengthened in 2017, as Dollar Index weakened over 10%

• At the start of the year, on fears of

“reflation trade” EM currencies were

looking weak. However during the

year, as the EM’s continued to post

robust growth, their currency and

forex reserves positions improved. The

usual suspect “Current account

deficit”, also improved for most key

EM’s.

• Hence as we look into 2018, the EM

currency basket seems substantially

resilient (when compared in the last

couple of years).

• With the commodity recovery story

intact in midst of strong macro

environment, EM’s are set to deliver

strong & synchronised price

performance in 2018

Size of corrections in equity markets reducing due to resilient currency in last couple of years

• Since the last few years the steady flows

in the equity markets have restricted the

equity downsides. Certain major

downsides have become on account of

events like US rate hike, Election jitters in

Euro

Equity corrections have reduced

Major currencies have appreciated


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Rupee remained one of the strongest in EMs: Recent

sovereign upgrade may take it towards 62


Moody’s upgraded India last time in 2002-04. Over the

next few years, the rupee strengthened over ~15% and

tested its mean-3*sigma levels near | 39.50/US$

Rating agency Moody’s upgrades India’s sovereign

bond rating after 13 years on the back of improved

fundamentals and structural reforms. This could be a

booster for the rupee to strengthen against US$ and

it could test its mean 3-sigma level near 62.0


INR

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Stocks witnessing accumulation pattern- Quant Picks for 2018


Stocks Initiation range CMP Target Stoploss

Engineers India 184-191 189 245 161

Havells 525-539 538 655 470

Arvind 428-439 436 545 375

Adani Ports 392-402 398 495 345

GSFC 136-140 138 174 119

Stock selection based on recent fund flow action


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Engineers India: Finally moved above buyback price


Engineers India - Volatility

Company buyback seen near 157

Engineers India – lower wild swings indicate accumulation pattern

• Engineers India shares were

bought by the government at an

average price of | 157, which

would remain important in the

coming months

• The government had 57.02% in EIL

prior the launch of the | 658.80-

crore share buyback on July 25.

The 4.19 crore share buyback plan

at | 157 per share ended on

August 7. Post buyback

government holding is at 54.17%

• After spending some time near the

buyback price, the stock Has

taken out the last seven-year’s

supply zone of | 170-175

Buy Range : | 184-191 Target: | 245 Stop loss: | 161

Number of positive closings: Displaying consistently strong performance post 2016

Engineers India’s historical volatility has been on

a declining pattern, a sign of accumulation in the

stock. In a one-year period, it had declined from

51% to 31%. The stock has started moving

above the long time consolidation range

* Historical volatility is the standard deviation

of stock futures prices of previous months

2-year average 51%

1-year average 37%

6M average 34%

Current 31%

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105

110

115

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125

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135

140

2015 2016 2017

Ne

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Positive Close Negative Close Net Positive

No

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Return Intervals

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Havells: Volatility declines despite numerous jitters in 2017


Historical volatilityHavells – Returns are concentrated within (-2% to 4%) band and large declines are arrested

Buy Range: | 525-539 Target: | 655 Stop loss: | 470

Number of positive closings: Reverts from negative to positive

Havells – Coming out of last year’s

consolidation

• The recent reduction of GST on

cables from 28% to 18% has done a

word of good for the stock. It has

been coming out of last year’s

consolidation

• It is focussing on street lighting

where margins are expected to

remain high. In addition, the entry

into AC segment would also benefit

the company

• The recent price move has seen

37% closure of short positions.

These were positional shorts,

which were added in the stock in

the last nine-month consolidation

Despite witnessing numerous profit booking

declines, Havel's volatility has gradually

been coming down. It is a sign of buying

seen at lower levels

2-year average 40.5%


6M average 32.6%

Current 31%

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100

150

2015 2016 2017

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Return Intervals

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Arvind: Coming out of last three-year’s consolidation


Historical VolatilityArvind – Despite underperformance in last year, the highest no. of returns seen within (-2% to 3%)


Number of positive closings post 2016 increase

Arvind – coming out of last three year’s

supply zone

• Arvind has started seeing positive

consolidation. Declines in the

stock have got limited

• The delivery buying activity has

increased of late, which has led to

a gradual rise in the stock

• The company has announced the

demerger of its branded apparel

and engineering business, which

would create value for its

shareholders

The volatility pattern of Arvind shows the

accumulation seen in the last couple of

years. The volatility in 2016 was near 50%

when the stock was trading near | 360

levels. This volatility has been continuously

declining and has come down below 40%,

which may act as a trigger for further

upsides in the stock



6M average 44.0%

Current 39.5%

0

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12

14

105

110

115

120

125

130

2015 2016 2017

Net

Pos

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Tota

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No

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Return Intervals

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Adani Port: Sharp reduction in volatility along with positional

short positions


Adani PortsAdani Ports – Accumulation seen with lower negative wild swings amid last 6-month consolidation


Seeing sharp surge in positive closings in 2017 after remaining dull in previous years

Historical volatility

Adani Port – Forming base above 2015

highs

• Government support for

infrastructure spending by private

players is likely to be a big push for

infrastructure players

• Government focus on increasing

modal share of sea base may lead

to higher investment in the port

space

• After seeing quite high closure of

short positions, the stock is

expected to pick up momentum

with addition of long positions that

are getting rolled over to

forthcoming month. Leverage is still

quite low in the stock, which can

limit downsides in F&O space

One of the sharpest falls was seen in Adani

Port volatility, which is an encouraging sign.

In the last six to seven months when it has

been consolidating above 2015 high of

| 370, volatility has declined from 32.5% to

25.8%, which is a sign of buying



6M average 32.5%

Current 25.8%

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150

2015 2016 2017N

et

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Return Intervals

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GSFC: Downsides have got limited due to ongoing

accumulation


GSFC – Saw numerous declines from 150 but negative returns frequency has been lower


Number of positive closings: While negative, have seen strong improvement in H2 of 2017

Historical volatility

GSFC – Declines getting arrested near

| 125-130

• GSFC started 2017 at | 120 and

has moved up to | 140 levels amid

quite a number of declines seen

from | 155-160

• We believe the accumulation

pattern is building up in the stock,

which has limited the declines and

also the much needed volatility.

• Direct benefit transfer (DBT) could

be a good trigger for this space. In

addition, the pick-up in rural income

could also lead to a better

performance

• There has been gradual

accumulation in the stock in the

cash and futures space. Since the

inception in F&O segment, open

interest in the stock has risen from

8 million shares to 21 million shares

Volatility of GSFC has started declining

since last year. Despite moving higher from

42% to 47% in 2016, it has declined from

47% to 37.5% in the last year. This has

happened despite recent profit booking from

| 160 to | 135 levels



6M average 44.5%

Current 37.5%

-30

-25

-20

-15

-10

-5

0

0

50

100

150

2015 2016 2017

Ne

t P

osi

tive

Tota

l Co

un

t


No

of

Ob

serv

atio

ns


Return Intervals

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Stock Performance in 12 months

Engineers India Havells

Arvind Adani Ports

120

130

140

150

160

170

180

190

200

13-Dec-16

3-Jan-17

24-Jan-17

14-Feb-17

7-Mar-17

28-Mar-17

18-Apr-17

9-May-17

30-May-17

20-Jun-17

11-Jul-17

1-Aug-17

22-Aug-17

12-Sep-17

3-Oct-17

24-Oct-17

14-Nov-17

5-Dec-17

310

360

410

460

510

560

610

13-Dec-16

3-Jan-17

24-Jan-17

14-Feb-17

7-Mar-17

28-Mar-17

18-Apr-17

9-May-17

30-May-17

20-Jun-17

11-Jul-17

1-Aug-17

22-Aug-17

12-Sep-17

3-Oct-17

24-Oct-17

14-Nov-17

5-Dec-17

300

320

340

360

380

400

420

440

460

480

13-Dec-16

3-Jan-17

24-Jan-17

14-Feb-17

7-Mar-17

28-Mar-17

18-Apr-17

9-May-17

30-May-17

20-Jun-17

11-Jul-17

1-Aug-17

22-Aug-17

12-Sep-17

3-Oct-17

24-Oct-17

14-Nov-17

5-Dec-17

250

270

290

310

330

350

370

390

410

430

450

13-Dec-16

13-Jan-17

13-Feb-17

13-Mar-17

13-Apr-17

13-May-17

13-Jun-17

13-Jul-17

13-Aug-17

13-Sep-17

13-Oct-17

13-Nov-17

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GSFC

80

90

100

110

120

130

140

150

160

170

13-Dec-16

13-Jan-17

13-Feb-17

13-Mar-17

13-Apr-17

13-May-17

13-Jun-17

13-Jul-17

13-Aug-17

13-Sep-17

13-Oct-17

13-Nov-17

Stock Performance in 12 months

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Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk,

ICICI Securities Limited,

1st

Floor, Akruti Trade Centre,

Road no.7, MIDC

Andheri (East)

Mumbai – 400 093

[email protected]

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higher for target of 11700… - icici...

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