Trader’s diary: $5 billion equity supply in September; market’s cost-of-carry is up

One key event to watch in next few weeks is the amount raised by the companies through primary and secondary offerings. NSEBSEArihant Capital Mark…Loading data…

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    ChartsValuation & Peer ComparisonCommunity BuzzPEER COMPANIES Lingering concerns over rising geopolitical tension between the US and North Korea dampened market sentiment during the week gone by. This made the BSE Sensex to slip 0.64 per cent to 31,687 on September 8 from 31,892 on September 1. NSE’s Nifty50 index shed 0.40 per cent to 9,934 from 9,974.

    Will these worries go away quickly?
    In the ongoing tension on the North Korea front, one good thing is that now there will be no surprise element for any emergency, if any, that may arise, says Jimeet Modi, Samco Group.

    FPIs offloaded $415 million worth of equities during the week while DIIs bought stocks worth $269 million in the cash market. “Although valuations are not cheap, the domestic demand for investments remains high. Several IPOs are lined up,” said Sanjeev Zarbade, Vice President for PCG Research at Kotak Securities.

    Hereunder, we have two traders giving their market outlook for the week ahead.

    Hemant Kanawala, Head of Equity, Kotak Life Insurance
    The market continues to trade strongly on the backdrop of strong domestic flows whereas FIIs are taking a cautious view due to downgrade in earnings. Although the results for the quarter ended June 2017 were expected to be weak, the actuals were below the revised estimates and hence led to downgrade in earnings for FY18.

    On a pan-India basis, the monsoon is also tracking below long term average but the distribution seems to be reasonable. Final crop output and demand in the festival season will be an important variable to track the trajectory of economic activity. GDP growth for the June quarter suggests that consumption is the only bright spot in the economy while private investment remains an area of concern.

    One key event to watch in next few weeks is the amount raised by the companies through primary and secondary offerings. Based on the funds already raised in August and indicative pipeline for the month of September, equity supply of $5 billion is expected, which can absorb a large part of liquidity available with the domestic institutions.

    Market expensive on PE basis
    However, the bright side of this fund raising is that it leads to a listing of many new businesses, which were not previously available to investors. This can hence attract an entirely new set of investors. The markets may look optically expensive on P/E basis as earnings have been depressed for last few quarters but on P/B basis, the markets are trading in line with long term averages and hence offers a reasonable opportunity to long term investors.

    Anita Gandhi, Whole Time Director, Arihant Capital Markets
    The domestic market is expected to remain volatile amidst geopolitical tensions. It is expected that market participants will closely watch developments, if any, in North Korea after recent hydrogen bomb test but on top of it. Further, all eyes are on FOMC meeting scheduled later this month.
    As the long-term outlook remains bright, investors are advised to stick to fundamentally sound stocks on dips. Factors such as macroeconomic data and trend in global markets will dictate trend on the bourses in the week ahead.

    Macro data galore
    On the macro front, the government will on Tuesday announce industrial production data for July 2017, which will be announced after market hours on that day. IIP in June 2017 had contracted 0.1%, the lowest reading since June 2013.
    The government will also announce inflation data based on consumer price index (CPI) for August 2017 on Tuesday. CPI had rebounded 2.36% in July 2017, compared with 1.46% in June 2017. While the inflation data based on wholesale price index (WPI) for August 2017, will be announced during market hours on Thursday. WPI rose to 1.88% (provisional) in July 2017 compared with 0.9% (provisional) in June 2017.

    Matrimony IPO opens on Monday
    In the coming week, the primary market will remain active. The initial public offering (IPO) of matchmaking services provider, Matrimony.com opens on Monday. Realty firm, Capacit’e Infraprojects is coming up with an initial public offering will open on Wednesday, 13 September 2017.

    On the global front, Bank of England will announce monetary policy summary and minutes of the monetary policy committee meeting on Thursday, September 14.In US, data on the consumer price Index for August will be announced on Thursday. The Federal Reserve’s monthly index of industrial production for August will be unveiled on Friday. Retail sales for August will also be announced on that day.

    What do technicals show
    On the technical front, Nifty has multiple strong supports at lower levels. Various supports are at 9,800 and 9,850 levels. We may see short covering in every dip. In the September option contracts, we are seeing options open interest building up Calls at strike price 10,000 and Puts at strike prices 9,800 and 9,700. So the probable range for next week could be between 9,800 and 10,000 with a positive bias. From the option data, we have been seeing shifting of range to the upper band.

    Implied volatility (IV) of Calls was up and closed at 11.23% while that for Put options it closed at 10.55%. The Nifty VIX for the week closed at 13.01% and is expected to remain sideways. Overall market’s cost-of-carry is up on the back of fresh long additions. Among Nifty Call options, the 10,000-strike Call has the highest open interest of above 40 lakh shares.

    The Put option at strike price 9,700 has the highest open interest of over 50 lakh shares in open interest respectively. The PCR OI for the week closed up at 1.13, which indicates OTM put writing. On the technical front, 9,850-9,900 spot levels are strong support zone and the current trend is likely to continue towards 10,100.

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