Place long bets on Nifty if it crosses 11,900: Kotak Securities

April series saw Nifty conquering the previous peak of 11,760 on a closing basis while registering an intraday all-time high of 11,856. However, throughout the month the price activity in the market was typically consolidative in nature. The broader market momentum was missing that led to some selling pressure pushing the index down towards 11,550. Leading sectors included banking, financial services and IT while metals and auto stocks have failed to give a medium-term breakout.

India VIX, which generally ranges between 12-18, is currently seen at around 23, which is relatively higher. A high VIX indicates higher volatility anticipated by market participants over the next few weeks.

During the 2014 election period, India VIX made a high of 39.30 while during 2009 the same was seen at 87. Owing to the face that the election outcome will have a significant impact on the markets, an elevated VIX is normal phenomena and not much should be read into the same.

The month of May is expected to remain highly volatile which is reflected in the elevated numbers of the volatility index. For Nifty, 11,890 is expected to act as stiff resistance for the short term. Unless the same is crossed, selling pressure cannot be ruled out. The immediate support is seen at 11,550, which is the last swing low. A breach below the same can intensify the sell-off and the market may plummet towards the March range breakout area of 11,100-11,000. For the index to continue its present upwards journey, a decisive breach above 11,900 along with broader market participation would be required.

However, from a slightly longer-term perspective, the larger setup for the market remains positive. Investors should remain invested and use any meaningful correction to accumulate quality frontline and select midcap stocks.

We believe that Nifty has formed a major base at 10,000 and going ahead it should scale to 13,000-13,500.

For traders, a 5-6 percent fall would provide a good buying opportunity. We would advise going aggressively long at around 11,200-11,100 or if the index crosses 11,900 mark. We would place the initial target at 12,400.

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Source: Moneycontrol

Kotak Securities expects next 3-4 months to be challenging, highly volatile

On the eve of an election year where populism taking over development agenda was a worry, the government presented an interim budget. While the undertone has been a balance between populism and a focus on consumption, it provided a feel-good factor to various sections of the population (farmers, middle class & poor) but with a slight slippage in the fiscal deficit.

On budget financials, the government has built in 10.2 percent & 11.5 percent growth in nominal GDP for FY19E (estimated) & FY20E, respectively. The nominal GDP growth of 11.5 percent budgeted for FY20 seems to be on the higher side. Direct tax & indirect tax collection is expected to rise by 19.7 percent & 14.4 percent in FY19RE (revised estimates) and by 15 percent & 11.8 percent in FY20BE (budgeted estimates), respectively. GST collection target for FY19 has been cut by Rs.one lakh crore and on the RE the government is building in 18.2 percent growth for FY20. Total Expenditure to grow by 14.7 percent in FY19RE and 13.3 percent in FY20BE. The lower expenditure growth in FY20E is on the back of 14.4 percent growth in revenue expenditure and only 6.2 percent growth in capital expenditure.

The gross GSec borrowing has been budgeted at Rs.7.1 lakh crore compared to Rs.5.7 lakh crore in FY19RE, implying higher average weekly issuances of Rs.158 bn compared to Rs.127 bn in FY19. Higher gross borrowing and concerns on the credibility of the revenue assumptions have pushed yields higher. With the government’s adoption of an expansionary fiscal stance and concerns on the elevated core inflation, the probability of monetary accommodation could reduce in the near term.

However, the seemingly structurally benign food inflation along with softening growth should provide space for the MPC to shift the policy stance to neutral. We expect the RBI to cut rates in the forthcoming policy meetings.

However, after some time, receding expectations of a rate cut, heavy GSec supply and a likely reduced pace of OMO purchases in FY20 (around Rs 1 lakh crore vs Rs 3.1 lakh crore in FY29E) will weigh on the bond markets. Benign global conditions, muted oil prices, and relatively more dovish global central banks could cap the sharp downside to bonds. Bond yields need to be in a range of 7-7.5 percent to provide comfort to equity valuations. After budget and going forward after elections market participants will focus on earnings.

Market Outlook: We see the next three-four months very challenging and filled with volatility for Indian markets (i.e. until the final outcome of Lok Sabha elections). Expect Nifty to be range bound till election outcome and then see a directional move on either side after the election results. Post interim budget we see pressure on bond markets to persist as the Gross GSec borrowing of Rs 7.1 lakh crore for FY20BE is quite high as compared to Rs.5.7 lakh crore of FY19RE. Any rise in bond yields could impact equity valuations and equity performance.

Q3FY19 results of Nifty companies are ahead of expectations and provide comfort to FY20E earnings forecast. Top-down market valuations look reasonable with Nifty trading at 16.3x FY20E and 14.1x FY21E. However, there is a wide dispersion in valuation across ‘quality’ stocks and ‘value’ stocks, which renders the top-down valuation view less meaningful. Till the election outcome ‘quality’ stocks will rule but investors may not want to buy them as they are too expensive in terms of valuations. On the other hand, ‘value’ stocks are very cheap but investors may stay away from them as they are not performing and the situation could remain similar till the election outcome.

Portfolio strategy: Expect defensive sectors to continue their outperformance until the election results. FMCG & consumption-related stocks along with Information Technology and few agriculture/rural plays will continue to draw investor interest. Apart from this, the theme of hardcore corporate banks is also playing out and could remain so in the course of the year. We also prefer the capital goods sector driven by base orders, pace of execution and low base

Valuation of mid-cap Index has gone down below that of Nifty but this space is not attracting any investment as of now and the situation could continue to be alike till the outcome of the election result. Hence, it is ideal to focus on good quality large caps for the next three-four months and change stance post-election based on result outcome. If the view is 2-3 years then select high earnings growth mid-caps, with sound management could be accumulated.

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Source: Moneycontrol