Hedge: December view: Walking on a tight rope

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December view: Walking on a tight rope
􀂄 Caution replaces exuberance
􀂄 Strong rollovers, albeit on a high base
􀂄 Q2FY11 result review
􀂄 GDP grows robustly at 8.9% Y-o-Y in Q2FY11
􀂄 Information & technology: Dollar movement to aid further rally
􀂄 Oil & Gas: Diesel de-regulation; illusion or reality
􀂄 Banking: Moving towards safer haven



Caution replaces exuberance
All of a sudden, caution seems to be taking over exuberance as the equity markets
venture the unchartered territory. The hype surrounding the listing of India’s
largest IPO (Coal India) was evenly matched as the stock ended the first day on
the bourses with gains of ~40%. December began with expectations of Nifty
breaching the all time high. After touching the new 52-week high of 6338, it has
been a bumpy ride for the benchmark so far, smitten by the wrath of few domestic
and global events. Despite the weakness, implied volatility (IV) of options has
remained at lower levels (~19-21%). In the last policy review meeting, RBI
tightened the norms for home loans, restricting lending to real estate &
construction sectors, warding off any asset bubble.

Corporate governance issues back home came to haunt the markets. If the Satyam
fiasco in CY09 was the tip of the iceberg, the recent CBI investigation of loan scam
by major Indian financial institutions threatens to unearth an entire iceberg in itself.
Also, the Andhra Pradesh government’s ordinance on regulating the Indian
microfinance industry kept on brewing throughout the month. SKS Microfinance
was at the receiving end as investors kept dumping the stock with every passing
session. It is currently quoting well below the issue price of INR 985. (03-Dec-10)
IIP grew 4.4% Y-o-Y in September, much below consensus expectation of 6.4%
and our expectation of 5.5%. Manufacturing sector growth, at 4.5% in September
from 7.5% in August, Y-o-Y, led the softness in the headline number. Sovereign
debt default concerns came to the fore as Ireland was on the threshold of
defaulting on debt obligations.

Fresh tensions in the Korean peninsula also made
global markets jittery. China went for yet another round of monetary tightening,
increasing the reserve requirement ratio by 50bps, to curb the inflationary
concerns in the economy. Thus, back-to-back negative news flows gave investors
enough reasons to take some profit off the table. For December, we expect the
upside in Nifty to be capped at ~6100 levels. Crucial resistance and support levels
for the index is placed at ~6000/6100 and ~5650/5550 levels, respectively.