India Equity Research: J.P. Morgan - Switch from Banks to IT: India Technicals

Switch from Banks to IT: India Technicals Asia Technicals Strategy: Charting The Course

The India “bullish” story is a lot better accepted today than even a month ago with optimism originating from political change translating into better expectations for a cyclical revival, and hence strong absolute/ relative performance for cyclical stocks. Fundamentally, it is hard not to share this optimism and we remain bullish on Indian Equities. Tactically however, we now see a technical opportunity in rotating from banks to IT services.

· A Rotation Too Far? A defining feature of the Indian market, well before the election-related optimism, was a solid performance for market indices, led by defensive sectors such as IT services and beneficiaries of currency depreciation, which collectively account for a substantial part of market indices. Now, the rotation has swung substantially away from defensives with a near 30% point under-performance over Mar-May’14. Figure 1 shows this substantial rotation at a MSCI sector level and Figure 2shows the components of Sensex.

· The Tide is Turning – As both Figures 1 and 2 show, while IT stocks remain weak on relative strength, the rate of change has started to distinctly turn in their favor. Arguably, as the country now deals with the bottom-up reality of a challenged macro backdrop, weaker currency and higher oil prices, the short-term trade is probably in favor of turning defensive.Technicals (see next) are clearly calling for this switch.

· IT Services – Absolute View – Figure 3 shows the weekly chart for the Nifty IT index clawing back 40wma support, aided by momentum (RSI) revival. In the process, CNXIT is also delivering a positive moving average x-over on 12-26 wmas. Weekly MACD is yet to deliver a buy signal, but given daily chart positioning (Figure 4 shows “golden-cross”, positive MACD/ RSI positioning, positive “ichimoku” positioning), we place higher odds on weekly MACD giving a buy signal. Absolute view on Indian IT services index is a Buy.

· IT Services – Relative to Nifty – Figure 5 captures the near 30% point under-performance over a short three-month period, now showing an initial turnaround with weekly RSI rising from oversold levels. Once again, while weekly MACD is yet to deliver a buy signal (outperformance), Figure 6 shows the daily version of this relative chart clearly signally a more positive positioning following a bullish RSI divergence and positive MACD signals. We expect IT Services in India to outperform the Nifty.

· Banks – Faltering Momentum? – Figures 7 (daily chart for Nifty banks Index) shows a bearish divergence with negative MACD cross-over giving rise to initial caution on this space. Figure 8 gives the same chart for PSU Banks with the added risk of a “double top”. We recommend taking profits on banks, particularly PSU Banks.

· IT vs. Banks – Figure 9 shows weekly relative index for Nifty Banks vs. Nifty IT and after a 70% point outperformance (Feb-May’14), we are seeing momentum fade (RSI has weakened) and daily charts (Figure 10), show a clear change in trend away from banks and in favor of IT services. We recommend switching from Indian Banks to Indian IT Services.

Figure 1: Rotation - MSCI India Sectors Back to Text