morning thoughts...
The markets rallied before the expiry and can see some more upsides before we see a reaction.
Technically the markets are nearing expiry and resistance zones and could see a reaction at higher levels.
At a time when the economy and commodity prices, particularly oil, are expected to have a big say on stock returns, which kind of stocks are likely to look attractive? The answer is obviously cyclical stocks. Stocks belonging to cyclical sectors tend to throw up the biggest returns when the cycle turns. And hence stocks that are otherwise vulnerable to slump in GDP growth and rise in input costs tend to look attractive when the cycle is favourable. So if you were shocked to see the commodity and financial sector stocks that were in cold storage in 2013, lead the rally since May 2014, here is an explanation. Any improvement in GDP growth is expected to have a direct and benign impact on the demand for these commodities and credit from financial sector. So, while the GDP growth should lead to better industrial output as a whole, the cyclical sectors could see the maximum earnings growth.
However, one factor that you cannot miss out while looking at cyclical stocks, particularly commodities, is the level of capacity utilization in the industries. For if the existing capacity is almost fully utilized, it will take years for the industry to create new capacity to absorb the higher demand. Plus the incremental capex will mean additional cash flow and higher debt in some cases. This is exactly the case in the US where capacity utilization has gone back to 2005-06 levels, which happens to be at the decade high. And by the time companies create new capacity, the demand growth could dwindle.
In the case of India Inc, however, capacity utilization is almost at a four year low. For sectors such as cement, automobile and steel , the utilization levels are at a decade low! Hence any upturn in economic cycle and demand could be absorbed very well by these industries, without any balance sheet strain. The higher utilization levels in turn will lead to economies of scale and help companies fetch higher margins. In other words, most of the volume gains will flow directly to the bottomline and shareholder returns!
Thus while Indian companies are overall well placed in the economic cycle, their 'capacity utilization levels' will allow select sectors to make hay while the sun shines. Make sure you do not lose sight of this number while looking for companies to invest in from these sectors.
Coming to the commodity markets base metals , energy and bullions looks weak though will oppurtunity at lower levels.
Yesterday's calls sent
Gold Mcx- sell at cmp 26900 sl 27050 targets 26500 - booked at 26635
Silver Mcx - sell at cmp 36900 sl 37100 targets 36200 - booked at 36315
Natural Gas Mcx - sell at cmp 215 sl 217 targets 205 - booked at 206
Double bumper Petronet 200 ca - booked at 7 - long from 2
Dlf - buy at cmp 134 sl 132.50 targets 140 - hit sl
Hexaware - buy at cmp 205 sl 203 targets 215 - hit sl
Maruti- buy at cmp 3470 sl 3455 targets 3425 - went 3433
Advance Nifty - booked at 8325 - long from 8079
Bank nifty - booked at 18700 - long from 17650
The markets rallied before the expiry and can see some more upsides before we see a reaction.
Technically the markets are nearing expiry and resistance zones and could see a reaction at higher levels.
At a time when the economy and commodity prices, particularly oil, are expected to have a big say on stock returns, which kind of stocks are likely to look attractive? The answer is obviously cyclical stocks. Stocks belonging to cyclical sectors tend to throw up the biggest returns when the cycle turns. And hence stocks that are otherwise vulnerable to slump in GDP growth and rise in input costs tend to look attractive when the cycle is favourable. So if you were shocked to see the commodity and financial sector stocks that were in cold storage in 2013, lead the rally since May 2014, here is an explanation. Any improvement in GDP growth is expected to have a direct and benign impact on the demand for these commodities and credit from financial sector. So, while the GDP growth should lead to better industrial output as a whole, the cyclical sectors could see the maximum earnings growth.
However, one factor that you cannot miss out while looking at cyclical stocks, particularly commodities, is the level of capacity utilization in the industries. For if the existing capacity is almost fully utilized, it will take years for the industry to create new capacity to absorb the higher demand. Plus the incremental capex will mean additional cash flow and higher debt in some cases. This is exactly the case in the US where capacity utilization has gone back to 2005-06 levels, which happens to be at the decade high. And by the time companies create new capacity, the demand growth could dwindle.
In the case of India Inc, however, capacity utilization is almost at a four year low. For sectors such as cement, automobile and steel , the utilization levels are at a decade low! Hence any upturn in economic cycle and demand could be absorbed very well by these industries, without any balance sheet strain. The higher utilization levels in turn will lead to economies of scale and help companies fetch higher margins. In other words, most of the volume gains will flow directly to the bottomline and shareholder returns!
Thus while Indian companies are overall well placed in the economic cycle, their 'capacity utilization levels' will allow select sectors to make hay while the sun shines. Make sure you do not lose sight of this number while looking for companies to invest in from these sectors.
Coming to the commodity markets base metals , energy and bullions looks weak though will oppurtunity at lower levels.
Yesterday's calls sent
Gold Mcx- sell at cmp 26900 sl 27050 targets 26500 - booked at 26635
Silver Mcx - sell at cmp 36900 sl 37100 targets 36200 - booked at 36315
Natural Gas Mcx - sell at cmp 215 sl 217 targets 205 - booked at 206
Double bumper Petronet 200 ca - booked at 7 - long from 2
Dlf - buy at cmp 134 sl 132.50 targets 140 - hit sl
Hexaware - buy at cmp 205 sl 203 targets 215 - hit sl
Maruti- buy at cmp 3470 sl 3455 targets 3425 - went 3433
Advance Nifty - booked at 8325 - long from 8079
Bank nifty - booked at 18700 - long from 17650
