NETRA January 2022 Early Warning & Signals Through Charts - DSP Mutual Fund
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NETRA
Early Warning & Signals Through Charts
January 2022Economy, Markets & Valuation
Favourable financial conditions to
aid economic recovery, but equity
valuations are expensive!Relatively Favourable Financial Conditions To Aid Recovery
105
Financial conditions index, which takes into 104 Tighter financial conditions Favourable financial conditions mean easy
account sovereign interest rates, the access to liquidity & credit and lower cost.
Financial Conditions Index- 3MA
103
exchange rate, equity valuations, & credit
spreads has been lower for India than the 102
west.
101
India’s financial conditions are easier than
100
the west, creating a case of favourable
recovery. While the taper & tightening 99
could hamper the financial conditions of the Favourable financial conditions
West, India is at a sweet spot, with a 98
supportive growth focused monetary policy. 97
It will be interesting to see if India can 96
sustain easier conditions for another
decade, creating a stage for both economic 95
Nov-10
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recovery & better asset class
performances.
India United States and Euro Area
Source: Bloomberg; Goldman Sachs FCI,DSP Data as on 30th Dec 2021Earnings Expectations Are High. Achievable?
Nifty EPS
estimates at
Nifty earnings consensus estimates point to doubling of earnings record
900
from lows of March 2020 and end of March 2023. This will rival
Corporate earnings haven’t grown at the the great run of noughties. Can this be achieved?
pace which markets expected over the last 761
many years. 27%
Nifty Index Earnings Per Share (EPS)
In fact, between FY11 to FY20, Nifty EPS &
growth change, year on year, on avg was CAGR growth between select periods
3.8%. In 2021, it crossed the 20% yoy mark 1%
for the first time since 2011. 441
408
7%
Can corporate India deliver such strong
earnings? At FY23 multiple of 19 times, 275
markets are priced to perfection. Usually 26%
markets trade close to 18 times PE.
Anything which derails this earnings growth 70
trajectory will spoil the equity market party. Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Mar-01
Mar-02
Mar-22 E
Mar-23 E
Source: Bloomberg; DSP Data as on 30th Dec 2021India Close To Record Equity Valuation Relative To Peers
S&P BSE Sensex Index/ MSCI Emerging Markets Index (Fwd Price to Earnings)
1.79 1.80
India enjoys a wide valuation premium over its emerging market peers.
This generous premium just reached one of its highest level recently.
Higher ROE, better incremental growth & 1.62
steady inflows from institutional investors
allow India to have a valuation premium
over its emerging market peers. 1.48
At this time, the premium is at a record.
Historically this has coincided with Average 1.4
subdued performance by Indian stocks.
A sign of caution for Indian equities. 1.24
1.05
S&P BSE Sensex Index/ MSCI Emerging Markets Index (Fwd Price to Earnings)
Source: Bloomberg; Data as on 31st Dec 2021Stock Market Breadth Has Weakened
100 16000
90 15000
Bob Farrell, a market veteran, wrote
10 rules of trading. 80 14000
One of his rule - Markets are strongest 70 13000
when they are broad & weakest when
they narrow to a handful of blue-chip 60 12000
names.
50 11000
Broad means when more stocks are
rallying versus narrow when less stocks 40 10000
are rising. 38
30 36 9000
The broad NSE500 Index has seen a 32
deterioration in breadth which is the 20 The market breadth has deteriorated more than it did in earlier 8000
worst since it bottomed in Mar’20. phases of correction. This is a red flag for trend continuation.
10 16 7000
This suggests that the index has more
downside left. It’s on a weak footing. 0 6000
Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21
% of Members Above 50DMA NSE 500 Index (RHS)
Source: Bloomberg as on 31st Dec 2021The Laggard Pharma Sector – Is There An Opportunity!
20.0 1.6
The operating matrices for Pharma have improved quite a 18.9
18.0 lot while its underperformance is at levels last seen in 2012. 17.2 1.5
Pharma sector has been a stark 16.0 1.4
underperformer in 2021. This has 1.3
coincided with a significant 14.0
improvement in the operating 1.2
12.0
metrics of the sector. 1.1
10.0
CFO to Revenue* is at record levels 8.8 1
which is a positive. While the sector 8.0
is yet to see any notable price 0.9
performance. 6.0 0.8
A possible risk-off in risk assets may 4.0 0.7
ignite a rally in the sector in 2022.
An opportunity to keep an eye on. 2.0 0.6
Mar 2007
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Mar 2021
*Cash From Operations to Revenue is a ratio that
tells investors how capable a company is, of
generating cash from sales
CFO/Revenue Nifty Pharma To Nifty Index Ratio (RHS)
Source: Bloomberg, Jarvis as on Dec 2021Bonds & FX Yields upmove likely to be muted,
rupee weakness ahead!India Yield Curve Is The Steepest Ever
3.0 9.5
India 10 Yr Gsec yield is at 6.45%, while the the 2 Yr Gsec yield is at 4.52%.
The spread between the two (the yield curve) is now near its widest in history.
India’s Government Securities (Gsec)
10 year minus 2 Year curve is close to 2.0 8.5
its steepest ever.
It’s steep because there has been 1.0 7.5
very large government borrowing
which kept rates elevated at the long
end. On the short end, Repo rate is 0.0 6.5
at an all time low of 4%.
This combination has caused the -1.0 5.5
yield curve to become steep.
RBI, even if it chooses to raise rates may
Implication is that once RBI begins to just cause this curve to narrow down and
-2.0 4.5
not cause long term 10 yr rates to rise.
raise rates, the curve will begin to
loose its steepness. So RBI’s monetary RBI has held on to the lowest
policy will have subdued impact on -3.0 rates for the longest time 3.5
long term rates in near future.
India 10 Yr Gsec - 2 Yr Gsec (%,LHS) RBI Repo Rate (%, RHS)
Source: Bloomberg; Data as on 31st Dec 2021Rupee Readjusting To A Deteriorating Trade Balance
110
Indian Rupee has outperformed most emerging market currencies since December 2020.
India saw a huge decline in its external 105
trade during waves of pandemic led
lockdowns. Being a net importer it 100 102.2
helped the Rupee to remain resilient
while most other Emerging markets 95
being net exporters were hit.
Consequently their currencies also 90 Rebased to 100 at Dec’20 89.3
weakened versus the USD. Indian Rupee JP Morgan Emerging Market FX Index
85
This is now reversing & readjusting.
Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21
Although India’s large FX reserves &
robust FPI flows allow the Rupee to 5
remain resilient overtime, the short 0 0.8
India Trade Balance (USD Bn)
term trend is weak.
-5
Rupee may weaken past its 78 level, an -10
all time low during this readjustment. -15
-20 Higher the trade deficit,
-25 more the pressure on Rupee-22.9
Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21
Source: Bloomberg as on Dec 2021Inflation Triggers Easing supply disruptions to calm
inflation & pull commodities lower.Supply Disruptions Are Easing
800.0 Backlog of orders reducing 70.0
Backlog of orders reducing are reducing in key markets like US,
Europe & Taiwan. Container & freight costs are also falling.
700.0 65.0
Supply disruptions have been a key
driver of global trends since the 600.0 60.0
lockdowns were introduced to fight
the spread of the virus. 500.0 55.0
In the last few months there are signs 400.0 50.0
that supply disruptions are beginning
to peak & have begun to ease. 300.0 45.0
This will have implications on 200.0 40.0
lowering inflation, putting pressure on Container &
commodity prices which benefitted 100.0 freight rates falling 35.0
from quicker recovery in demand
amidst poor supply. 0.0 30.0
May-18
Nov-18
Sep-18
May-19
Nov-19
Sep-19
May-20
Nov-21
Sep-20
Nov-20
May-21
Sep-21
Jul-18
Jul-19
Jul-20
Jul-21
Mar-18
Jan-19
Mar-19
Jan-20
Mar-20
Jan-21
Mar-21
Container Freight Rates (Rebased to 100) LHS Baltic Dry Index (Rebased to 100) LHS
US Manufacturing PMI - Backlog of Orders Taiwan Manufacturing PMI - Backlog of Orders
Source: Bloomberg as on Dec 2021Slowing Liquidity Is A Risk To High Metal Prices
5,000 US Fed has begun tapering its QE program. Bank of England has raised its 60%
benchmark rates by a token amount & would no longer do QE. Liquidity
G4 Central banks have seen their is reversing from a very easy position to normal. 50%
4,500
balance sheets grow by nearly 66%
since the pandemic began. Such 40%
unprecedented liquidity injection, 4,000
supply side bottlenecks & liberal 30%
government stimulus allowed 3,500
commodity prices to rally. Oil & Metals
20%
were the biggest beneficiaries.
3,000
With most central banks now tapering 10%
their easing programs, the implication
2,500 0%
for these commodity prices could be
negative. Especially when supply side
issues are also resolving. 2,000 -10%
May-12
Nov-14
Feb-16
Nov-19
Sep-15
May-17
Sep-20
Feb-21
May-22
Jun-14
Jun-19
Jul-16
Jul-21
Oct-12
Mar-13
Aug-13
Apr-15
Dec-16
Oct-17
Dec-21
Jan-14
Mar-18
Aug-18
Apr-20
Jan-19
LMEX Index - Base Metal Prices (LHS)
G4 Central Banks Balance Sheet (Adjusted 6 Month Forward) (RHS)
Source: Bloomberg as on Dec 2021Inflation To Ease With Commodity Prices
8 100%
7 Inflation moves in a very tight step with commodity prices. 80%
6 As supply side disruptions are eased & Central Bank stimulus
Inflation readings in most countries is dialed back, commodity prices and inflation are likely to slow. 60%
have made multi decade highs. Retail 5
& wholesale inflation readings have 40%
4
been sticky & rising.
3 20%
Commodity prices have a strong 2 0%
bearing on inflation trajectory. As
commodity prices ease & demand 1
-20%
supportive stimulus is dialed back, 0
the inflation picture is likely to ease. -40%
-1
Expect inflation readings to gradually -2 -60%
moderate after March 2022 aided by
falling commodity prices. -3 -80%
US CPI Inflation (YOY %, LHS) GSCI (Commodity Index) (YOY %, RHS)
Source: Bloomberg; Data as on 31st Dec 2021A Red Flag For Best Performing Metal Equities
1200 80,000
Steel prices have begun to ease from near record 70,000
1000 levels. This could weigh on metal equities in India.
NSE Metal Index has been the best 60,000
performing index in CY 2021. It has
gained nearly 68%. 800
50,000
Rising prices of the underlying
metals & a strong rally in risk assets 600 40,000
helped the performance a great deal.
30,000
400
Both these factors are now reversing
& may add to the recent bout of 20,000
weakness in Indian metal equities, 200
especially steel stocks. 10,000
0 -
08-Jan-16 08-Jan-17 08-Jan-18 08-Jan-19 08-Jan-20 08-Jan-21
China export East Asia India HRC - Rs/T (RHS)
HRC - US$/T HRC - US$/T
Source: CLSA, Data as on 2021Keep going. Good things take time.
Disclaimer In this material DSP Investment Managers Pvt. Ltd. (the AMC) has used information that is publicly available, including information developed in-house. Information gathered and used in this material is believed to be from reliable sources. The AMC however does not warrant the accuracy, reasonableness and / or completeness of any information. The above data/statistic are given only for illustration purpose. The recipient(s) before acting on any information herein should make his/their own investigation and seek appropriate professional advice. This is a generic update; it shall not constitute any offer to sell or solicitation of an offer to buy units of any of the Schemes of the DSP Mutual Fund. The data/statistics are given to explain general market trends in the securities market, it should not be construed as any research report/research recommendation. We have included statements / opinions / recommendations in this document, which contain words, or phrases such as “will”, “expect”, “should”, “believe” and similar expressions or variations of such expressions that are “forward looking statements”. Actual results may differ materially from those suggested by the forward looking statements due to risk or uncertainties associated with our expectations with respect to, but not to, exposure to market risks, general economic and political conditions in India and other countries globally, which have an impact on our services and / or investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices etc.
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