FY18 started on a very optimistic note for Indian financial markets. BJP had just scored a massive electoral victory in UP. This was widely assumed to mean that people and economy have moved on leaving the scar of Demonetization behind. The market participants were full of hope anticipating GST to be panacea for many economic ailments. The proposed New bankruptcy law, that was about to be passed by Lok Sabha, promised speedy resolution of NPAs. Analysts were very optimistic about earnings finally growing, after staying mostly flat for two preceding years. The financial year has however ended on a rather cautious note with below par returns and considerably moderated expectations forFY19. The popular commentary suggests that the participants are worried about a variety of factor. Some prominent of these factors could be listed as follows:

1. State of Indian Equity Markets
Thursday, 29 March 2018 Analysis
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FY18 ended on a cautious note
The financial year 2017-18 started on a very optimistic note for Indian
financial markets. BJP had just scored a massive electoral victory in UP.
This was widely assumed to mean that people and economy have moved on
leaving the scar of Demonetization behind. The market participants were full
of hope anticipating GST to be panacea for many economic ailments. The
proposed New bankruptcy law, that was about to be passed by Lok Sabha,
promised speedy resolution of NPAs. Analysts were very optimistic about
earnings finally growing, after staying mostly flat for two preceding years.
The financial year has however ended on a rather cautious note with below
par returns and considerably moderated expectations forFY19.
The popular commentary suggests that the participants are worried about a
variety of factor. Some prominent of these factors could be listed as follows:
1. Earnings growth has been below expectations, and may see downgrade
in coming months. The valuations appear elevated.
2. The rate cycle appears to have turned. Next RBI move may be a hike.
3. Banks may see a fresh round of slippages.
4. Continuation of production curbs by OPEC could see crude prices
remaining firm and rise further. Inflation & CAD situation may worsen.
5. Higher US yields may see acceleration in FPI selling, even in debt,
putting further pressure on INR.
6. A spate of election in next 15months could lead the government to focus
more on rural areas (higher farm subsidies and MSP) and less on urban
infrastructure.
7. GST stabilization may take longer than estimated, thus keeping the
fiscal at elevated level.
8. We may see higher supply of PSE stocks to meet the fiscal gap.
9. Global growth may falter as inflation and rates pick up.
10. Market internals have weakened and warrant a correction to gain
strength.
There are many events
in the womb of time
which will be delivered.
Othello, Scene III
William Shakespeare
(1564 – 1616)
Team InvesTrekk
investrekk@gmail.com

2. 29 March 2018
2
FY18 - By the end, caution clouded hopes
The financial year 2017-18 started on a very optimistic note for Indian
financial markets.
BJP had just scored a massive electoral victory in UP. This was widely
assumed to mean that people and economy have moved on leaving the scar
of Demonetization behind.
The market participants were full of hope anticipating GST to be panacea for
many economic ailments.
The proposed New bankruptcy law, that was about to be passed by Lok
Sabha, promised speedy resolution of NPAs.
Analysts were very optimistic about earnings finally growing, after staying
mostly flat for two preceding years.
The world economy and markets were also looking in great shape. The fears
of Trump disrupting the global economy had mostly receded. US Fed had
assured of orderly normalization of monetary policy. ECB and BoJ were still
in "whatever it takes" mode and appeared in no hurry to withdraw stimulus.
Riding on the high hopes, markets world over rose to new highs. Indian
equities also scaled new highs, before some dark cloud started gathering on
the horizon.
Energy prices suddenly appeared sustaining at higher levels. US President
appeared acting on his threat to build tariff walls and VISA restrictions. US
yields started to rise. Domestic inflation started to pick up. Liquidity
tightened, pushing rates higher. FPI flows turned negative even in debt.
Market started anticipating a hike from RBI instead of cut. A bout of new
bank defaults raised fear of fresh slippages. CAD shot up beyond 2% of
GDP. Growth targets were cut. Earnings did not match the expectations.
The market accordingly responded negatively.
Benchmark equity indices corrected ~10% from their all time highs. Broader
markets corrected even higher. One year SIP return vanished. Debt fund
returns also moderated considerably as bond yields rose sharply.
Introduction of long term capital gains tax and inclusion of equity funds in
the ambit of dividend distribution tax in union budget for FY19 changed the
rules of the game for equity investors.
Change of rules prescribed by SEBI for categorization and benchmarking of
mutual fund schemes also caused some disturbances in the market.
A certain degree of uncertainty has crept in after the recent bypolls in UP &
Bihar, and withdrawal of TDP from NDA fold.
Consequently, the financial year is ending on rather cautious note with
below par returns and considerably moderated expectations forFY19.
.

3. 29 March 2018
3
What is bothering Indian markets?
In past two month there has been a definite change in the market
sentiment. A significant number of market participants, who hitherto held
an unqualified positive view on Indian equities, have turned conspicuously
cautious. A number of legendary investors and reputable fund managers
have sounded multiple notes of caution.
Even Rakesh Jhunjhunwala, fondly termed Warren Buffet of India, has also
opined, a couple of weeks back, that Indian market might have already
logged their intermediate top and may not rise from current levels in a
hurry.
Foreign bankers like CLSA and Morgan Stanley have reduced the weight of
India in their model emerging market portfolios by 1-2.5%, in past few
weeks.
This caution is on the back of incessant selling by foreign investors in past
many months. Out of past 10months, FPIs have been net sellers on stock
exchanges for 9 months.
The incremental domestic flows that have characterized the market rally in
past couple of years, are also showing some signs of fatigue. At the end of
FY18, Nifty shows no return during last 8months of the financial year.
The even deeper correction in broader markets indicates that the non-
institutional domestic investors might be on the verge of capitulation.
Another 5-7% correction from the current level might trigger an exodus.
The popular commentary suggests that the participants are worried about a
variety of factor. Some prominent of these factors could be listed as follows:
1. Earnings growth has been below expectations, and may see downgrade
in coming months. The valuations appear elevated.
2. The rate cycle appears to have turned. The next RBI move may be a
hike.
3. Banks may see a fresh round of slippages.
4. Continuation of production curbs by OPEC could see crude prices
remaining firm and rise further. Inflation & CAD situation may worsen.
5. Higher US yields may see acceleration in FPI selling, even in debt,
putting further pressure on INR.
6. A spate of election in next 15months could lead the government to focus
more on rural areas (higher farm subsidies and MSP) and less on urban
infrastructure.
7. GST stabilization may take longer than estimated, thus keeping the
fiscal at elevated level.
8. We may see higher supply of PSE stocks to meet the fiscal gap.
9. Global growth may falter as inflation and rates pick up.
10. Market internals have weakened and warrant a correction to gain
strength.

4. 29 March 2018
4
Earnings estimates may see some moderation
The aggregate earnings growth estimates for FY19 and FY20 appear
somewhat optimistic and may need moderation in coming months, since
analysts are not fully factoring the impact of the following in their estimates:
(a) Rise in financing cost.
(b) Persistently high inflationary expectations and hence acceleration in
wage cost.
(c) Higher compliance cost, including higher incidence of tax and higher
compensation for natural resources.
(d) Further deterioration in asset quality of banks and NBFCs as (i)
paranoia hits compliance & audit functions; and (ii) rise in lending rates
impairs debt servicing capability of more marginal borrowers.
(e) Extrapolating 3QFY18 earnings to FY19 and FY20 may not be
appropriate as this quarter had a low yoy (DeMo affected) and qoq (GST
roll out impact) base. The aggregate 3Q growth normalized for these two
major disruptions, does not give much reason for being ebullient,
especially considering that the earnings have remained flat for past
three years.
An analysis of 25 reports analyzing 3QFY18 results and forecasting FY19
and FY20 earnings post these results show a certain degree of bullish bias
amongst analysts, They appear predetermined to project a rather optimistic
picture of FY19/FY20 earnings. They have therefore tried to present 3Q
analysis on selective basis, like Ex-financials, Ex-SBI, Ex-energy, Ex-
financials & OMCs etc.
Ignoring this selection bias and considering the aggregate numbers, it may
be found that:
(i) Nifty top line grew 13.4% (yoy) despite a low base affected by DeMo.
(ii) Nifty EBIDTA grew by 8.8% below consensus estimates of over 11%.
(iii) Nifty PAT grew 7%, much below estimates of over 13%.
The consensus amongst analysts is forecasting ~25% EPS growth in FY19
and another 18-19% growth in FY20. We have hardly seen any downgrades
in past 6months. On these basis one year forward PE of current Nifty level is
close to 16x, which is close to the long term average.
We need to account that before the dust finally settles on NPA issue, we may
see another round of business disruptions, as credit is squeezed and cost is
hiked.
It would be highly imprudent to ignore the broad based earnings recovery
and green shoots sprouting in various patches of the economy. But still,
over optimism of analysts and failure on earnings delivery so far, is certainly
making markets cautious.

5. 29 March 2018
5

6. 29 March 2018
6
(Source: Motilal Oswal Securities, Credit Suisse)

7. 29 March 2018
7
Rate trajectory has turned up
As per a recent report published by RBI, currently the average capacity
utilization in Indian industries is close to 72%. This has been the case for
few years. The IIP growth during this period has been at multi year low.
However, the inflation has jumped above the RBI target rate of 4%.
This is when the economic growth has just started to pick up and is still
seen much below the potential, leaving a large output gap. Private
consumption is showing no sign of revival, employment level remains poor,
and most of the investment demand is driven by public investment.
Despite benign growth, high output gap, and poor consumption growth, the
rates have started to rise. Most banks have raised both the deposit and
lending rates in past few weeks. The benchmark government bonds yields
hace risen by more than 110bps in past six months.
The arguments in favor of higher bond yields have been many but mostly
unsubstantiated, e.g., fiscal concerns, rise in global yields etc.
This situation is quite unusual. There is no instance in recent history where
rate cycle would have reversed in this early stage of growth cycle.
So far we have not seen any effort from the government or RBI that would
inspire confidence. To the contrary, the still rising stress in bank balance
sheets, tighter domestic liquidity (though RBI announced early this week,
pumping of Rs1trn in market to ease liquidity), tightening global liquidity
threaten that rates may stay elevated in near term at least.
Higher cost of funds may not only impact corporate profitability, but also
impede the investment plans.
Since, RBI is totally focused on inflation targeting, banks have to deal with
the new set of problems, and government may get too busy with election
schedule - the growth may not be a top priority for now.
This must be certainly bothering equity investors.

8. 29 March 2018
8

9. 29 March 2018
9
Financial stress is far from over
Indian banks have been struggling with the issue of non-performing assets
(NPAs), for past few years. A deeper study may be needed to establish the
cause and effect relationship between the bank balance sheet problem and
broader economic growth trend. Nonetheless, the NPA problem got
exacerbated when the GDP growth has seen a declining trend.
The credit growth so far has remained quite subdued. More worrisome is the
fact that Personal loans, usually considered the most vulnerable segment of
bank credit has become a dominant segment in credit growth. In December
2017, it contributed 43.3% to the incremental credit mix. Within personal
loans, the riskiest segment Credit Card lending took the lead, while growth
in vehicle financing moderated to 9.3% YoY.
There are a multitude of reasons responsible for deterioration in asset
quality of banks. Some prominent being:
(a) Delay in execution of large infra and industrial projects, due to
protracted litigation, departmental clearances and financial closures.
(b) Poor judgment of the viability of the project.
(c) Economic slowdown impacting the demand.
(d) Frauds, scams and manipulations
(e) Global development (dumping, change in technology etc.) rendering the
projects unviable subsequently.
In past few months, the government took a number of steps to repair the
balance sheets of public sector banks, notably, recapitalization of banks and
accelerated resolution of NPAs under the new bankruptcy law. However,
some recent events appeared to have impacted the revival plans for banks.
For example:
(a) In its bid to accelerate the NPL clean-up, RBI has withdrawn all forms
of restructuring dispensations such as 5/25 refinance, strategic debt
restructuring (SDRs), S4A etc. The RBI has also asked banks to
expedite the resolution process in existing cases where the
restructuring guidelines have been invoked; else those cases would be
referred to the bankruptcy courts.
(b) The alleged fraud that started at PNB, has created tremendous
uncertainty in the entire banking sector. The extent and impact of the
fraud is difficult to judge at this stage. This is likely to make bank
managements, regulators and auditors excessively paranoid.
(c) Most importantly, the rate cycle in the economy looks to have started
moving higher
These events (a) threaten to impact profitability of lenders; (b) may require
material amount of further provisioning; and (c) may lead many more "on
the edge account" into NPA category.
The markets may therefore be right in bothering about the health of
financial sector in near term.

10. 29 March 2018
10

11. 29 March 2018
11

12. 29 March 2018
12
External trade balance worsening
After improving for two years (mainly on low oil prices), the trade deficit of
India has started worsening again.
In the last three fiscal years, India experienced a positive terms of trade
shock. But in the first three quarters of 2017-18, oil prices have been about
16 percent greater in dollar terms than in the previous year. It is estimated
that a $10 per barrel increase in the price of oil reduces growth by 0.2-0.3
percentage points, increases WPI inflation by about 1.7% and worsens the
CAD by about $9-10 billion dollars.
The market opinion on oil price trajectory going forward is vertically divided.
One section believes that OPEC and Russia should continue to control
production supporting higher prices for global crude. The other view, is that
rise in US production of shale oil, adequate inventories and slow demand
growth should render the OPEC cuts ineffective and global crude oil prices
should correct back to sub $50/bbl level.
Whatever be the future outcome, the Indian markets seem worried about the
prospects of higher oil prices sustaining through 2019. Given the empirical
experience, the collective wisdom of market seems to be pricing in a fiscal
slippage due to oil subsidies staging a comeback in election year (2019).
The current account deficit has also widened in 2017-18 and is expected to
average about 2% percent of GDP for the year as a whole. The current
account deficit can be split into a manufacturing trade deficit, an oil and
gold deficit, a services deficit, and a remittances deficit. In the first half of
2017-18, the oil and gold balance has improved (smaller deficit of $47
billion) but this has been offset by a higher trade deficit ($18 billion) and a
reduced services surplus ($37 billion), the latter two reflecting a
deterioration in the economy’s competitiveness.
Moreover, given the low growth base of oil and gold deficit, a likely pick up
there could worsen the picture further.
The worst part remains that despite all government effort to improve trade
balance, like increase in import duties and import substitution efforts
through programs like Make in India, may have limited impact only due
mainly to lack of resource availability & capability.
Nonetheless, like other deficit currencies like Indonesian Rupiah and
Philippine Peso, Indian Rupees is also seen vulnerable to external shocks,
because they need funding for their current-account deficits, and the
environment is not supportive for portfolio flows.
Any currency to the much talked about trade war may weaken INR further,
given its vulnerability to external shocks. No wonders, INR has been one of
the worst performing emerging currencies in last one month.
The worst part remains that despite all government effort to improve trade
balance, like increase in import duties and import substitution efforts
through programs like Make in India, may have limited impact only due
mainly to lack of resource availability & capability.

13. 29 March 2018
13

14. 29 March 2018
14
Reversing rate cycle in US
US Federal Reserve is unambiguously committed to the normalization of
monetary policy. Between 2013-2017, the Federal Reserve completely
withdrew the bond buying program (QE) that was started in the wake of
global financial crisis in 2008-09. The Fed started to address the near zero
interest condition from December 2015 and has already effected five hikes of
0.25% each in the bench mark Fed Fund Rate, which currently stands at
1.5%.
Though FOMC of US Federal Reserve has never indicated a rethink on its
decision to normalize the policy and rates, the market participants keep
debating it based on the multitude of data released every hour.
At present the popular opinion on the likely Fed action is somewhat divided.
A large majority is betting on 2-3 more hikes of 0.25% each in 2018;
whereas some believe that Fed may have a long pause before hiking
anymore. Anticipating the rate hike trajectory, the yields on US bonds have
already rose close to 2.8%.
Even if we go with the official version of Fed and expect a sustained and
orderly normalization of policy rates over next few quarters, the other things
remaining same, we may see US yields rising in tandem (or even sharper)
with further Fed rate hikes. Given that Sensex has a strong negative
correlation (-0.74) with the US yields (based on data since April 2000), it is
fair presume that Indian equities may continue to be negatively impacted by
the rise in US yields.

15. 29 March 2018
15
With election drawing near, fears of political uncertainty rising
Political uncertainty is something that has perennially bothered Indian
equity markets. In past few years the scope of this totally avoidable trouble
to the market has in fact widened significantly.
Earlier, the market was used to generally bother only about general
elections. However, in recent times, the market has shown jitters during
almost all assembly elections, local body elections, and even bypolls to 2-3
Lok Sabha constituencies that have no immediate bearing on the Lok Sabha
arithmetic.
To make the matter even more ridiculous, many market participants were
seen highlighting the outcome of the student union elections of some
universities in their discussions and presentations.
Though, there is little evidence to show that politics in India had any lasting
impact on stocks markets, nonetheless, elections have certainly caused rise
in volatility. Therefore, it is reasonable to believe that a heavy election
calendar in 15months must be affecting the investors' sentiment currently.
In next 15 months, we have elections to 10 state assemblies, together
accounting for 160 (30%) Lok Sabha seats. Out of these currently 5 states
are under BJP/NDA rule (accounting for total 68 Lok Sabha seats).
The market shall be keenly watching the 5 state assembly election that may
be completed before the next Lok Sabha election. The popular perception
seems that a setback for the ruling BJP in any one of the larger states, e.g.,
Karnataka, Rajasthan, MP and Chhattisgarh will open up the contest in
April-May 2019 general elections.
As of now, there is nothing to suggest that outcome of these elections will
have any material impact on real economic conditions of the country.
Nonetheless, the market may witness heightened volatility during the
process.

16. 29 March 2018
16
GST stabilization may take longer than expected
The government implemented a nationwide Goods and Services Tax from
July 2017. The single tax subsumed a plethora of indirect taxes like Excise
Duty, Sales Tax, Entertainment Tax, and a number of other Local Taxes.
The roll out of GST has been a mammoth exercise, considering the
complexities involved in multiple state wise tax structures. The situation is
further complicated by the fact that GST implementation has apparently
forced a large number of businesses which were hitherto escaping the tax
net. Naturally there is a game of Tom of Jerry between the tax authorities
and the new tax targets.
The early trends suggest that GST collections have fallen to Rs851bn in
February 2018, after initially recording a run rate of well over Rs900bn in
first three months. This fall is not in tandem with the broader economic
growth trend, that has picked up in 3QFY18.
Recent reports have suggested huge discrepancies in the GST returns filed
so far.
As per reports, the revenue department analysis of returns filed so far
suggests that only 16 per cent of the summary sales returns under GST
have matched with the final returns.
According to the GST returns data, 34 per cent of businesses paid Rs
34,400 crore less tax between July-December while filing initial summary
return (GSTR-3B).
These 34 per cent of the businesses have paid Rs 8.16 lakh crore to the
exchequer by filing GSTR-3B, whereas analysis of their GSTR-1 data show
that their tax liability should have been Rs 8.50 lakh crore.
As per the analysis by the revenue department, initial returns filed and
taxes paid by 16.36 per cent of the businesses have matched with their final
returns and tax liability. They paid a total tax of Rs 22,014 crore.
However, the data also showed that there was excess tax payment of Rs
91,072 crore by 49.36 per cent of businesses registered under GST between
July-December. While they have paid Rs 6.50 lakh crore as GST, the GSTR-
1 filed by them shows that their liability should have been Rs 5.59 lakh
crores.
Given that the success of GST is mostly predicated on the accuracy of self
assessment and voluntary compliance, 84% of the taxpayers filing erroneous
returns is certainly a matter of concern.
GST being the single largest source of revenue for the government,
accounting for about one third of the gross tax revenue, the fiscal balance of
the government depends to a large extent on success of GST.
Moreover, the impact of GST on smaller and unorganized businesses (mostly
unlisted) which have been mostly out of tax net hitherto, is not fully known
as yet.

17. 29 March 2018
17
The realization of full impact will only clear the picture about the loss of
employment opportunities, impact on household savings & consumption,
and incremental growth of medium & large organized businesses (many of
them publically traded).
The uncertainty is obviously bothering the investors in Indian equities.
In my view, this concerns may not be totally valid. Such a major change
obviously take some time to stabilize. However, if the experience drawn from
implementation of VAT (MODVAT, CENVAT) and service tax are considered,
there is little doubt that the mechanism will stabilize in due course and be
beneficial for the Indian economy; regardless of the teething troubles for few
quarters.

18. 29 March 2018
18
Busy IPO calendar
FY18 has been one of the best years for initial public offerings (IPOs) of
Indian equities. In first none months of the year corporates garnered over
Rs1.5trn of investment, against Rs1.4trn garnered in FY08.
To make the temporal comparison, the fund raising at 1.5% of GDP was
lower than the 2.8% recorded in FY08 and 1.8% in FY10.
However, at ~24x PE ratio, the cost of equity was at ~4%, which is very
much comparable to the bubble years

19. 29 March 2018
19
Though the IPO momentum has continued in 1Q2018, the investors'
interest appears waning as the market corrected.
The fatigue is very much conspicuous as two high profile PSU IPOs (Bharat
Dynamics Limited and Hindustan Aeronautics Limited) in March have failed
to attract sufficient bids from non-institutional investors at least.
In Union Budget for FY19, the government has budgeted Rs800bn receipts
through disinvestment of public sector equity. The target may have to be
raised if GST revenue misses target. Some of this target could be met
through inter se sales (e.g., IOC buying government stake in OIL and HPCL
and BPCL buying government stake in GAIL). Nonetheless, these
transactions will need debt raising by the buying entity, thus straining the
availability of funds for growth financing.
PSBs are also required to raise Rs580bn equity from market as part of the
recapitalization approved in October last year. Given the recent development
and likely fresh round of write offs and slippages, the target may have to be
raised.
Besides, few high profile public offerings (e.g., NSE. six India Railway
ancillaries, GoAir, National insurance, Reliance General insurance, UTI
AMC, HDFC AMC, IREDA, EESL, are also planned to hit the market in next
few months.
Then there is this superstition amongst many market participants that a
large overpriced IPO always leads to the market fall. The popular example
cited is the infamous IPO of ADAG's Reliance Power Limited in early 2008.
The Rs115.6bn IPO was oversubscribed 72x, generating bids worth over
Rs7trn. Unfortunately, the listing of IPO coincided with the global melt
down. Even after a decade, the market value of that company is still 85%
lower than the IPO valuation.
Given the following the market is obviously worried about the impending
supply of paper :
(a) Below par performance of many recently listed IPOs;
(b) Just ~10% CAGR on Nifty during four years from FY15 to FY18;
(c) One year FD, Liquid Fund returns close to 7%; and (d) full tax
exemption for LTCG being no longer an USP for equities.

20. 29 March 2018
20
Doubts over sustainability of current global growth momentum
In recent past, many reputable economists have raised concerns over
sustainability of current global growth rate, in the wake of rising rates and
inflation pick up.
However, debating or worrying about inflation (or deflation for that matter)
at this point in time may be meaningless. The global economy is at the cusp
of a number of material changes that will shape the future of global
economy for next couple of centuries perhaps. The comparable situation
that comes to mind is the industrial revolution days of 19the century.
Historically, energy and food inflation have bothered the people most. There
is little indication that we can have any bout of sustainable inflation in both.
As the ageing demographics in the developed world inspires the work
automation technologies — the life styles, consumption patterns, trade
balances etc are all set to change beyond recognition.
In the medium term therefore the chances of world slipping into a sustained
period of deflation are much higher than any inflation outburst.
At the same time the demographic imbalances and technology inequalities
will inevitably trigger a wider unrest.
Given that an overwhelming majority of world's population lives in poor and
technologically deprived (on relative basis) countries, we might see another
round of colonization (this time virtual) taking place.
But these are long term concerns. In the near term stagflation (lower growth
and higher inflation) seems like a valid concern.
As the recent Absolute Return Partner's recent letter to investors (see here)
pointed out, "the US output gap has now vanished. It is therefore fair to say
that there is currently little slack overall in the US economy. Plenty of
economic slack in the post-crisis environment is very much why inflation
has been so modest in recent years – not only in the US but worldwide. If
economic slack has now largely disappeared, at least in the US, rising
inflation and a more aggressive FOMC is only what can be expected."

21. 29 March 2018
21
(It may be noted that the Absolute Return Partner do not appear subscribing to
the inflation bust theory. They seem more inclined to the deflation bust story).
In a recent BoFA fund managers' survey, an overwhelming 74% of
respondents expressed that global economy is in late cycle of growth. This
was the highest percentage in Survey history. At the same time the
respondents voiced the highest inflation expectations in over 13 years. As a
reminder, global growth turns south coupled with inflation you get
"stagflation", and when as a result the "late cycle" economy end, recession
begins.
The market worry may however be stemming from the paradoxical investor
behavior. The survey report notes that even as the "smart money" sees both
a stagflation and recession as just around the corner, they put in even more
cash into the market. Ominously investors yet to act on fears, as rates and
earnings are keeping the bulls bullish. Cash levels fell from 4.7% to 4.6%."

22. 29 March 2018
22
Market internals weakening
Since July 2017, the internals of the Indian equity markets have weakening.
Though the benchmark indices and broader market indices recorded their
all time highs in January 2018, the monthly average trading values show a
different picture.
The difference between the rate of monthly change in Nifty values and
monthly average traded value suggests that stronger hands have distributed
equities to weaker hands.
(Distribution of equities is a common bear market phenomenon, in which
sporadic market bursts which see low volumes, create a false sense of
bullish market and lure unsuspecting smaller investors/traders in buying
equities.)
After July 2017, only October and December have seen monthly change
higher than the change in monthly average of Nifty. This suggests that the
market has mostly been downtrend and up moves had been few and
smaller.
The trend is confirmed by consistently poor market breadth, as indicated by
the poor advance decline ratio. The market has seen this ratio below 1
(implying that number of advancing stocks have been lower than the
number of declining stocks) in 9 out of past 12 months.
Technically Nifty at threshold of two important events — (a) crossover of
50EDMA below 100EDMA and (b) Nifty sustaining below 200EDMA.
In mid 2015 this occurrence resulted in sharp corrections.

23. 29 March 2018
23
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
8000
8500
9000
9500
10000
10500
11000
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Average of monthly traded value declining sinceJuly 2017
Nifty Monthly Average Traded Value Change (MoM %) RHS
-1.25%
0.55%
-0.35%
0.99%
-2.81%
3.20%
-2.03%
-2.08%
3.81%
-2.74%
3.03%
0.41%
-2.87%
-0.71%
-3.00%
-1.50%
0.00%
1.50%
3.00%
4.50%
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Distribution pattern since August 2017
Difference between MoM % Change in closing value and average traded value
0.70.80.911.11.2
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Monthly Advance Decline Ratio (NSE)
Advance Decline Ratio

24. 29 March 2018
24
(Source: moneycontrol.com)
(Source: Value research)

25. 29 March 2018
25
Markets corrected
sharply in last two
months.
Consumption best
performer, pharma the
worst.

26. 29 March 2018
26
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