Covid-19 trend, progress of monsoon to drive market

Buoyed by the RBI's continued accommodative stance, positive global cues, declining Covid cases and reopening of the economy; markets ended in the green for the third consecutive week. Benchmark indices are at all-time highs. Top-10 most valued companies are Reliance Industries, Tata Consultancy Services, HDFC Bank, Infosys, Hindustan Unilever, HDFC, ICICI Bank, State Bank of India, Bajaj Finance and Kotak Mahindra Bank.

The Sensex closed the week above 52,000 mark for the first time, rising 677.17 points or 1.32 percent to 52,100.05, while the Nifty rallied 234.60 points or 1.52 percent to 15,670.25. The broader markets outperformed the benchmark indices with the BSE Midcap index gaining nearly 4 percent and Smallcap index up by 3.3 percent. The rally between the years 2018 and 2020 was largely driven by Largecaps and the fall was ferocious among smallcaps, which were down by 80-90 percent. Fast forward to 2021 - Small & Midcaps are playing catch-up.

FIIs have infused close to Rs 8,000 crore into Indian equities in the first four trading sessions of June as risk-on sentiment improved amid rapidly falling new Covid cases and robust corporate earnings. The inflow comes following a net withdrawal of Rs 2,954 crore in May and Rs 9,659 crore in April. Change of FIIs mood clearly visible say observers. With the announcement of unlocking in a staggered manner by the various states, there is the hope of an increase in pent-up demand in some pockets of the economy. Unlock trade in the markets to gain further momentum say observers.

The Reserve Bank of India on June 4 kept key policy rates unchanged citing persisting uncertainties on the economic front due to the Covid-19 pandemic. The RBI also downgraded the GDP growth forecast for FY22 to 9.5 percent compared with 10.5 percent earlier. GST revenue in May amounted to Rs 1,02,709 crore as several States imposed curbs due to the second wave of the pandemic, down from April's record Rs 1.41 lakh crore. It was 65 per cent higher than Rs 62,009 crore in the year earlier, when the lockdown was in place. Observers say that the numbers were higher than expected and pointed to the economy getting back on track. The data signals that the effect of the curbs hasn't been as harsh as estimated.

IMD has predicted a normal monsoon this year. GAIL India, Union Bank of India, Central Bank of India, MRF, Engineers India, Petronet LNG, Bata India, SAIL, BEML, BHEL, DLF, Sun TV Network, CARE Ratings, JK Cement, and Sobha will release their quarterly earnings next week. A prolonged period of low volatility is often followed by highly volatile periods. This may cause the market to either consolidate or see measured corrective move at higher levels. This is one of the major things that market participants will need to guard against in the coming weeks.

Near term direction of the market will be guided by Covid-19 trends, pace of vaccination, progress of monsoon, macroeconomic data like IIP numbers and global factors. On the global front, weaker-than-expected US jobs data released on Friday would ease concerns over money tightening by the US Federal Reserve. A cautiously positive view is advised for the week ahead.

Heard on the Street

Don't Be Fooled by This Stock Market's Newest Magic Trick. Fund returns have just taken some of the biggest, fastest swings in history - and could mislead investors who aren't paying attention. Small cap mutual funds gave up to 220 per cent returns in 1 year! The best performing scheme in the smallcap category has given 217 per cent returns in the last one year. The second best performer has generated 139 per cent returns. What happened? Did hundreds of fund managers start popping genius pills? No, although marketing departments of mutual funds are probably gearing up to tout their brilliance. Instead, the ghastly losses of early 2020, when stocks fell by 34 per cent, have just disappeared from trailing one-year returns.

As a result, websites, apps and account statements will be showing monstrous performance that's nothing more than a happenstance of the calendar. It's one of the best - or worst! - examples seen as what finance researchers call time-period dependency. How much your investments earn always depends on when you start counting and when you stop. In the real world, people don't invest all their money on the first day of a month or year; they put more in whenever they can, and take money out whenever they have to. And history is always in flux: Market crashes come and go, often making managers look better by chronological accident. Such blips create what market players call "easy comps."

Performance takes an automatic upward leap when crashes drop out of the record. When you have a triple-digit year this suddenly, danger signs should be flashing, even longer-term performance numbers can be skewed by short-term swings if they're big enough. The pandemic's easy comps will linger in some year-over-year economic results until the second half of 2021. According to equity analysts, the reason for the stellar returns and outperformance of small caps over mid and large caps in last one year is the significant valuation gap at the start of the rally.

The correction that started in small caps in 2018 bottomed out post Covid. During the correction period, there has been a lot of consolidation in small cap space with weak getting weaker, and strong, stronger. The balance sheets have been cleaned up. And the liquidity crunch has eased. Well placed and managed companies in this space have shown resilience amid pandemic, with some of them reporting best ever quarterly performance post June 20. To be sure, financial markets have probably factored those distortions into stock prices already. For the next few months, investors should be even more skeptical than usual about claims of superior performance. No one deserves credit just for a quirk in the calendar.

Quote of the week

"We don't prognosticate macroeconomic factors, we're looking at our companies from a bottom-up perspective on their long-run prospects of returning

— Mellody Hobson

It's very difficult to predict when the next recession or stock market crash will come, so many of the best investors don't even try. Instead, look for good companies with the strength to make it through the occasional challenging economic environment.

FUTURES & OPTIONS / SECTOR WATCH

With the benchmark index Nifty moving into uncharted territory, surge in speculative volumes was seen in the derivative segment. The first week of the new series witnessed maximum Call open interest at 15,700 strike, followed by 16,000 and 15,800 strike; and the maximum Put open interest at 15,500 strike, followed by 15,000 and 15,600 strikes. Call writing was seen at 15,800 strike, followed by 15,700 and 16,300 strikes with Call unwinding at 15,600, 15,200 and 15,400 strikes. Put writing was seen at 15,500, 14,900 and 15,400 strikes with hardly any Put unwinding. The Implied Volatility (IV) of calls closed at 13.45 per cent while that for put options closed at 14.85 per cent. The Nifty VIX for the week closed at 15.75 per cent, a 17 month low. PCR OI for the week closed at 1.67.

The volatility has consistently been declining, hitting the lowest levels since February 2020, largely due to declining Covid risk with significant fall in daily infections. Experts feel this is positive sign for bulls but also sends some caution signal given the significant fall in volatility. Option data indicated that the Nifty could see a trading range of 15,000 to 16,000 levels in coming sessions. Punters expect stock specific action rather than any sharp upside in index. Sectorally, some profit booking was seen in Banking, IT, Pharma and Metal counters.

With IMD predicting a good to better monsoon, companies from specialty chemicals or fertilisers related sectors, tractors, consumer names like auto are expected to do well this year say industry watchers. Tractor and two-wheeler manufacturers like Mahindra & Mahindra, Escorts, Hero Motocorp and Bajaj Auto will be big beneficiaries. Stock futures looking good are BHEL, HDFC Bank, Hero Motocorp, Tata Motors, Voltas and Zee Entertainment. Stock futures looking weak are Aurobindo Pharma, ITC, CUB, ICICIGI, Powergrid and Mphasis.

STOCK PICKS

Moschip Technologies Limited

Moschip Technologies Limited, formerly Moschip Semiconductor Technology Limited, is a fabless semiconductor company and Internet of Things/Everything (IoT/E) focused company. The company's principal activity includes software development and designing. The Company is engaged in the business of development and manufacturing of System on Chip (SOC) technologies.

The company focuses on providing value added services in very-large-scale integration (VLSI) design, application specific integrated circuits (ASICs), software development and development system on a chip (SOC) for aerospace and defense, consumer and industrial applications and Internet of Things/Everything (IOT/E) products and services across various industries.

First fabless semiconductor company in India and over the years it had shipped millions of connectivity-based chips to customers all across the world.

Why we are recommending

1. MosChip's indigenous asset monitoring platform – GeoHEMS for real time monitoring and control of moving and non-moving assets is being adopted by multiple global OEMs. It is a solution for performance, condition, anomaly detection, preventive / predictive maintenance and analysis. With larger adoptions in IoT segment security vulnerabilities are expected to grow and the solution is future proof with highest level of security of TLS 1.2 implementations. MosChip has won contracts from overseas Global OEMs and system integrators for design, production and supply of the solution and its variants.

2. Equity Shares were allotted pursuant to conversion of Equal Number of warrants on preferential basis at a price of Rs.45 in 2019. Market players expect the share price to cross this level in next few months.

Buy between Rs30-32 for target price of Rs60-65 in twelve months. Stop loss should be at Rs27. Risk / Reward Ratio is 1:9. Management restructured. Possible very good performance in next couple of quarters. Good high risk high reward counter.