India Equity Strategy - Positioning for Inflation Peaking ::JPMorgan

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 Inflation – to peak in 3Q CY? June WPI data surprised positively and the
view that inflation could peak out over the next quarter is beginning to gain
ground. The interest rate swap market is reflecting the change in sentiment –
five-year OIS rates have declined by a substantial 90 bps from recent peaks.
Long bond yields have also softened by 20 bps and the corporate yield curve
is no longer inverted. Our analysis of data over the last decade suggests that
the Swap and G-Sec markets have been good lead indicators (by 1-2 months)
in predicting the peak of inflation. J.P. Morgan economists expect the WPI to
peak out in August as the complete pass-through of the recent fuel price hike
is captured.
 Peaking inflation and sectoral performance. Analysis of past inflation
cycles suggests that Consumer Staples, Financials and Utilities sectors tend to
typically outperfom in the quarter post the inflation peak. Financials stand out
in terms of relative outperformance. We reiterate our Overweight stance on
Financials.
 Investor sentiment remains uncertain. Trading values and volumes remain
weak and outstanding positions remain subdued. FIIs turned buyers, while
DIIs have been sellers. Our money flow monitor suggests inflows into
Financials and Industrials and outflows from Energy and Consumer
Discretionary.
 Insider transcations. Insiders were marginal net buyers over the
month. The breadth was positive too.
Net buys: DLF, Indiabulls Real Esate, HDFC Bank, HDFC, Dr. Reddy’s
Lab, IDFC, Hindalco
Net sells: ITC, Kotak Mahindra Bank, Indusind Bank, Lupin, Axis Bank