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1-1.S&P BSESENSX.BSE - 01/09/14 Trend7

Daily

Month Gone By • The Benchmark indices ended positive for the month of August 2014. BSE Sensex rose by

2.87% and Nifty closed higher by 3.02% for the month. Frontline Indices: Week

No % Chg

Key Positives Key Negatives Sensex Nifty

1 -2.2 -2.0

• The HSBC India Manufacturing Purchasing Managers' Index(PMI), a measure of factory production, rose to 53.0 in July, upfrom 51.5 in June, signaling a solid improvement in businessconditions.

• The barometer index, the S&P BSE Sensex, fell below thepsychological 26,000 mark during the week to settle at overtwo week low. The 50-unit CNX Nifty also finished at its lowestlevel in over two weeks. The market logged decline in threeout of four trading sessions in the week just gone by.

2 +3.1 +2.9

• The government approved raising FDI limit in the defencesector to 49% and opened up the railway infrastructuresegment for foreign direct investment.

• The RBI in its third bi-monthly monetary policy statement for2014-15 kept the repo rate unchanged at 8%. The reverse reporate was kept unchanged at 7% and Cash Reserve Ratio (CRR)was maintained at 4%. The SLR was cut by 50 bps to 22%.

• The HSBC Services Purchasing Managers’ Index (PMI), compiledby Markit, fell to 52.2 in July from June’s 17-month high of54.4. Growth in India’s services sector eased in July as neworders slowed, prompting some companies to put hiring planson ice.

Monthly Strategy Report – September 2014

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3 +1.2 +1.6

• SEBI approved rules for the creation of real-estate investmenttrusts and infrastructure-investment trusts in the countrywhich will help provide a new source of funding for real estatedevelopers and investors in infrastructure projects.

• The wholesale price index (WPI)-based inflation declined to afive-month low of 5.19% in July from 5.43% in the previousmonth.

• Industrial Production in India increased 3.40% in June of 2014over the same month in the previous year

• India's foreign exchange reserves fell to $319.35 billion as ofAug 8, compared with $319.99 billion the week earlier.

• The consumer price index (CPI) inflation, on the other hand,rose to 7.96% in July against 7.46% in June.

4 +0.8 +0.5

• Positive global cues, lower crude oil prices and continuedinflow of foreign funds into the Indian equities pushed keybenchmark indices to record high in the truncated tradingweek.

• Indian GDP growth for the first quarter of the financial yearbeat expectations to come in at 5.7%, the highest in the last 9quarters.

Global markets:

• The performance of the sectoral Indices was mixed. The top two gainers were Auto and Healthcare, which rose by 11.6% and 8.2% respectively. The top two losers were Realty and Metal which fell by 8.8% and 6.2% respectively.

Indices Jul-14 Aug-14 % Change

US - Dow Jones 16563 17098 3.2

US - Nasdaq 4370 4580 4.8

UK - FTSE 6730 6820 1.3

Japan - Nikkei 15621 15425 -1.3

Germany - DAX 9407 9470 0.7

Brazil - Bovespa 55829 61288 9.8

Singapore - Strait Times 3374 3327 -1.4

Hong Kong – Hang Seng 24757 24742 -0.1

India - Sensex 25895 26638* 2.9

India - Nifty 7721 7954* 3.0 Indonesia - Jakarta Composite 5089 5137 0.9

Chinese - Shanghai composite 2202 2217 0.7 th

• World markets ended the month of Aug 2014 with a mixed performance. While the standout performers were Bovespa, Nasdaq, Dow Jones, Nifty and Sensex all rising by 9.8%, 4.8%, 3.2%, 3.0% and 2.9% respectively, the other list of gainers included FTSE, DAX, Jakarta, Shanghai all were up by 1.3%, 0.7%, 0.9% and 0.7% respectively. Other indices like Nikkei, Strait times and Hang sang fell by 1.3%, 1.4% and 0.1% respectively.

• Average daily volumes on BSE during the month of Aug 2014 fell by 17.4% M-o-

M. (NSE daily average volumes fell by 12.8% M-o-M). The average daily derivatives volumes on NSE fell by 3.2% to Rs. 218675.01 cr in August.

Sectoral performance:

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BSE Indices 30-Jul-14 31-Aug-14 % chg Remarks Sensex 25895 26,638.1 2.9 Smallcap 9989.4 10,264.5 2.8 Midcap 9188.2 9,298.9 1.2 BSE 500 9831.5 10,096.1 2.7 BSE 200 3144.8 3,233.7 2.8 BSE 100 7799.7 8,016.7 2.8

Auto 15490.7 17,293.7 11.6

• Auto sales in India rose for the second straight month, according to July sales data released byindividual auto makers, suggesting that a recovery may have begun to take hold in the sectorafter a two-year slump. Analyst expects the upcoming festive season to set the pace of demandrecovery especially in cars/two-wheelers, aided by pent up demand and macro recovery. Someof the gainers in this index were Bosch, Bajaj Auto, Tata Motors and M&M.

• The rise was further due to very good set of Q1FY15 results from Eicher Motors and Tata Motorsand strong post-result concall commentary by the management of M&M.

Bankex 17485.6 18,003.7 3.0 • Banking shares, mainly PSUs, were in demand and trading higher also on reports that theFinance ministry will take tough measures on rising scams in state-owned banks.

Capital Goods 14651.6 14,913.2 1.8 • The index closed flat due to subdued results from the capital goods companies for the quarterended June 2014.

Consumer Durables 8556.9 9,180.8 7.3

• With the announcement of new initiatives by the government to kick start economic growthinvestors expect that demand for consumer durables will continue. Further, with the ensuingfestive season, consumer goods such as air-conditioners, washing machines, televisions,jewellery and other home appliances are likely to remain in demand. After a sluggish trend overthe past 2-3 years demand for jewellery from the US is like to pick up ahead of the Thanksgivingand Christmas season. Most of the big US retailers would be placing orders well in advance asdemand is likely to revive with economy showing signs of growth.

• Sentiment on domestic economic activity appears to be reviving, with incoming data suggestinga firming up of industrial growth and exports. The June round of the Reserve Bank's industrialoutlook survey also points to improvement in business expectations in Q2. Also the RBI’sdecision to maintain the repo rate and reduce SLR by 50 bps helped the sentiments to rise inview of increased liquidity in the market which can allow consumers to buy goods. Alsosatisfactory Q1FY15 results of couple of consumer durable stocks led the index to rise. Themajor gainers of the index were PC Jeweller, Whirlpool India, Titan and Blue Star.

FMCG 7169.8 7,401.8 3.2

• Shares of Jubilant Foodworks rose by 15.16% on back of two major foreign houses maintainingpositive stance on the stock with one maintaining a buy recommendation and other initiatingcoverage on the company.

• However the Index was dragged down after raising taxes on cigarettes and calling for acountrywide ban on sale of tobacco products, the Centre is now planning to introduce tougherprovisions under law to curb tobacco consumption in the country. From banning branding oncigarette packets to raising the age limit on tobacco consumption to 25 years from 18, tosubstantively increasing penalties for smoking in public, the Union Health Ministry is considering

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a host of amendments to the anti-tobacco law.

Healthcare 12341.3 13,356.9 8.2

• Healthcare, being a defensive play, saw a positive momentum. Among the leading packs wereSun Pharma, Aurobindo Pharma, Torrent Pharma, Glenmark Pharma and Lupin which were all updue to good set of Q1FY15 results delivered by all and weaker rupee against the dollar.

• Ranbaxy jumped on the back of Sun Pharma’s focus on its integration with itself by the calendaryear end.

IT 9742.3 10,085.9 3.5

• Index gained as the Rupee was trading near 5-month low. The rupee fell to its lowest sinceMarch 14 as good dollar buying was seen from foreign banks likely on behalf of clients looking toexit their equity and debt investments in India.

• Among the winners in the index were Oracle Financial Services Software (good set of Q1FY15numbers), Infosys (due to news of buyback of shares worth Rs 11,200 crore), Tech Mahindra andWipro.

Metal 13064.3 12,252.7 -6.2

• This fall was led by Bhushan Steel Ltd (BSL) after CBI arrested Neeraj Singal, Vice Chairman andManaging Director of BSL, in connection with Rs 50 lakh bribery scandal involving CMD ofSyndicate Bank S K Jain.

• SAIL fell due to the government’s decision to merge a sick PSU with SAIL. • Sesa Sterlite which fell by 5% due to corporate governance issue pertaining to the loan extended

by Cairn India to its subsidiary. • Metal sector fell on announcement of government approval of revision of royalty rates on iron

ore to 15% against 10% earlier and Manganese ore would attract a royalty equivalent to 5% from4.2% of the notified sales price.

Oil & Gas 10749.8 11,184.9 4.0

• The sector had a mixed performance by the companies. RIL dipped on concerns that its marginson retail fuels would come under pressure after state-owned oil PSUs lowered petrol prices.Some of the upstream companies like ONGC, Oil India and GAIL fell as the Government hikedthe upstream fuel subsidy burden due to which ONGC’s fuel subsidy outgo will rise by 4.5 percent in April-June quarter. Due to this action, the fuel retailers like HPCL and IOCL rose.

• A decline in global crude prices boosted oil & gas stocks along with good set of result for Q1FY15from BPCL. Also ONGC (net profit rose on back of higher realisation from sale of crude oil) andGAIL (India) (though the bottom line was down by about 23%, it was mainly impacted due toone-off items) were up by 4.01% and 4.43% respectively on the back of decent Q1FY15 numbers.

Power 2133.6 2,041.8 -4.3 • NTPC fell owing to a decline in profit in Q1FY15 results due to the new tariff regulation. PSU 8012.1 8,096.3 1.1

Realty 1893.3 1,727.4 -8.8

• Shares of real estate were under selling pressure after retail inflation as measured by CPIaccelerated to 7.96% in July from 7.46% in June. Realty company Unitech witnessed sellingpressure after the Central Bureau of Investigation (CBI) began a fresh probe in 2G spectrumallocation case.

TECK 5488.1 5,594.3 1.9

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Fund Activity

Particulars Net Buy / Sell Net Buy / Sell Open Interest Open Interest

Remarks July -14 Aug –14 July -14 Aug–14 FII Activity (Rs. in Cr) FII Activity (Rs. in Cr)

Equities (Cash) +11413.6 +6436.7 • FIIs continued to be large net buyers in Aug. Index Futures +322.8 +1337.6 10294 11199 • FIIs were small net buyers with a rise in open interest. Index Options +3575.5 +11061.5 42012 43573 • FIIs were net buyers with rise in open interest. Stock Futures +5066.4 +5569.3 49492 44849 • FIIs were net buyers with rise in open interest. Stock Options -456.8 -670.8 73 27 • FIIs were net sellers along with major rise in open interest.

MF Activity (Rs. In Cr) MF Activity (Rs. In Cr) Equities (Cash) +5084.3 +6957.6 • MFs were large net buyers in the month of August. FIIs were net buyers of debt papers buying a net amount of Rs.17105.5cr of debt papers compared to Rs. 23039 cr worth debt bought in July.

• Indian G-Sec bond yields ended higher by 6 bps at 8.56% at the end of August 2014 over

July 2014. The new government bonds (G-Sec) [new benchmark is 10 year security 8.40% GOI 2024 introduced from 24th July 2014] fell marginally despite hopes the government would sell less debt after receiving surplus profit from the central bank, while a drop in crude prices also aided.

• In Aug 2014, the Reuters/Jefferies CRB Index of 19 raw materials ended lower by 0.57%

to close at 293. The Reuters/Jeffries CRB Index fell on account of a fall witnessed in commodities like Cotton (down 1.2%), Sugar (down 6.8%), Crude Oil (down 4.9%), Heating Oil (down 1.5%), Silver (down 4.0%), Lean Hogs (down 23.31%), Copper (down 2.1%) and Nickel (down 1.1%). However the rest of the raw materials were positive like, Natural

Bond Yields

Commodities

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Gas (up 7.2%), Coffee (up 7.0%), Live Cattle (up 6.12%), Aluminium (up 4.3%), Corn (up 4.2%), Wheat (up 2.97%), Gold (up 1.2%), and Cocoa (up 0.4%).

• Behaviour of commodity prices (including LME 3 month buyer prices for base metals)

during the month ended Aug 2014 is given below.

Behaviour of commodity prices (including LME 3 month buyer prices for base metals) during the month ended August 2014: Commodity 29-Aug-14 31-Jul-14 % Chg Reasons

Gold 1287 1281 +0.43 • Gold price rose as the dollar and equities fell after U.S. President Barack Obama authorised air strikes in Iraq,

adding to simmering international tensions and sapping appetite for risk. • Gold prices fell on speculations that the Federal Reserve will increase interest rates earlier than expected.

Crude Oil 96 98 -2.08

• Production at peak levels from US refineries and shutdown of the Kansas refinery are some of the reasons thatcontributed to the decline in US crude oil prices.

• WTI crude oil fell amid speculation that U.S. oil demand is slowing after a government report showed weeklycrude inventories expanded for the first time since June.

• WTI crude oil fell as investors pushed geopolitical concerns surrounding violence and unrest in Ukraine andIraq to the back burner.

Aluminium 2113 2020 +4.60 • The fundamentals of supply and demand have been moving in the right direction to encourage higher prices

Copper 6970 7120 -2.10

• Copper prices steadied but remained low due to increased supply and lacklustre demand from top consumerChina.

• Copper fell after a string of reports on China's economy suggested a softening property market was proving adrag on growth, adding to concerns of a slowdown in Europe sparked by the Ukraine crisis.

Zinc 2360 2370 -0.40 Nickel 18570 18775 -1.09

Tin 21875 22925 -4.58

• Until recently analysts were forecasting a deficit in the order this year, but the latest indications are thatsecond-quarter production in both Indonesia and China was considerably higher than expected. Also inaddition, the electronics industry has been very sluggish in the first half of the year. So the forecast deficithas pretty much disappeared.

Lead 2251 2246 +0.24

• The Baltic Dry Index (BDI) rose 51.92% in the month to close at 1147. The jump in prices for sending freight goods around the world indicates that shipping firms are seeing a sharp rise in demand for their services.

• The dollar ended on a positive note against major currencies for the month of August. The dollar rose against major currencies as investors added to bets that the Federal Reserve would move to raise interest rates sooner than previously thought. Also US

Currencies

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currency climbed versus most of its major peers as a Fed measure of the nation’s economy expanded more than forecast last month.

Given below is a table that shows the depreciation (-)/appreciation (+) of the dollar against various currencies for the month of August 2014:

USD to: 31-Aug-14 31-July-14 % Chg

Reasons

Pakistani rupee 103.17 98.80 4.4%

Hong Kong dollar 7.75 7.75 0.0%

Chinese yuan 6.15 6.17 -0.3%

Indian rupee 60.53 60.20 0.5% Rupee fell against the Greenback on late profit booking in local equities and fresh dollar demand from oil importers.

Taiwan dollar 30.76 30.03 2.4%

The U.S. dollar rose against the Taiwan dollar as the greenback recouped its earlier losses on the back of local central bank intervention.The central bank's presence offset the impact from rising demand for the Taiwan dollar from local exporters to meet their funding needs as the month came to an end.

Singapore dollar 1.25 1.24 0.5%

Argentine peso 8.49 8.20 3.7%

Argentina’s black market peso fell to a record low as demand for dollars rose to protect against inflation and a weaker currency in the aftermath of the second default in 13 years.

Peso fell to strike a new record low on the black market, as investors reacted to plans unveiled by the government to restructure its external debt.

Euro 0.76 0.75 2.0%

The euro fell to a near one-year low against the dollar as investors positioned for rising chances of further policy easing by the European Central Bank.

Euro weakened against most major currencies after data showed that German retail sales declined unexpectedly in July.

Thai baht 32.66 31.95 2.2% Thai baht fell as the USD rally started to spread to high-yielding EM currencies. In addition, the baht was not helped by domestic news that the national legislative assembly voted unanimously to select junta leader Prayuth Chan-Ocha as PM.

Malaysian ringgit 3.16 3.19 -0.7%

Indonesian rupiah 11709.60 11641.40 0.6%

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Japanese yen 104.10 102.39 1.7%

The dollar rose against the yen as traders appeared to look past a disappointing US consumer spending report to focus on mostly brighter economic data.

The Japanese yen slipped against the other major currencies in European deals, as traders sold safe-haven assets amid a rebound in European stocks, though geopolitical tensions still weighed.

Brazilian real 2.27 2.24 1.2%

Korean won 1040.37 1025.75 1.4%

South Korea’s won fell against a rising dollar as comments by Federal Reserve Chair Janet Yellen boosted bets the U.S. central bank will increase interest rates.

Won fell after strong U.S housing data propelled the dollar higher against a broad range of currencies.

(Source:www.oanda.com) Comparison of Equity Returns in various markets - MSCI Indices in US$ terms MSCI Index Last MTD 3MTD YTD 1 Yr MSCI Index Last MTD 3MTD YTD 1 Yr BRIC 302.6 3.1% 9.1% 8.7% 19.0% EUROPE 1,753.0 0.2% -4.0% -0.4% 14.8%

EM (EMERGING MARKETS) 1,087.9 2.1% 5.9% 8.5% 17.0% G7 INDEX 1,539.5 2.3% 2.5% 5.5% 19.1%

EM ASIA 489.2 0.9% 6.1% 9.6% 19.1% WORLD 1,748.7 2.0% 2.0% 5.3% 18.7%

EM EUROPE 398.7 -1.1% -6.9% -8.9% -2.1%

EM EUROPE & MIDDLE EAST 337.2 -0.9% -7.4% -9.4% -2.6% ISRAEL 232.9 -3.1% 1.1% 17.1% 28.0%

EM LATIN AMERICA 3,663.5 7.8% 13.0% 14.5% 20.2% ITALY 310.2 -2.3% -8.4% 4.2% 23.1%

AUSTRIA 1,050.5 -2.2% -14.6% -17.7% -10.2%

CHINA 66.1 0.2% 9.5% 4.8% 13.9% JAPAN 2,710.1 -2.2% 3.4% -1.9% 7.9%

INDIA 508.2 2.4% 7.0% 24.8% 49.8% SINGAPORE 4,328.4 -2.2% 1.5% 4.7% 12.0%

INDONESIA 849.3 -1.4% 5.2% 27.6% 16.6% NORWAY 3,287.1 1.6% -2.4% 6.2% 14.5%

KOREA 461.2 -0.8% 1.8% 4.2% 15.8% NETHERLANDS 2,493.8 1.7% -2.7% -3.2% 11.0%

MALAYSIA 519.5 0.9% 1.4% 2.4% 10.6% CANADA 1,974.8 2.1% 7.7% 12.5% 20.6%

PHILIPPINES 572.4 2.6% 5.9% 22.5% 21.4% SWITZERLAND 5,307.8 2.2% -2.4% 2.6% 14.3%

TAIWAN 327.9 2.9% 6.4% 13.1% 21.1% BELGIUM 1,622.2 2.5% -0.3% 4.2% 19.5%

THAILAND 423.0 4.9% 13.9% 21.0% 18.6% IRELAND 174.3 2.9% -6.9% 2.0% 18.6%

BRAZIL 2,692.4 10.8% 18.4% 21.4% 27.6% USA 1,917.1 3.8% 4.2% 8.4% 22.7%

CHILE 1,714.0 -0.5% -6.4% -7.0% -8.8%

COLOMBIA 1,172.1 2.1% 6.7% 12.9% 3.0% Frontier Markets

MEXICO 7,475.2 5.0% 9.5% 7.2% 18.3% FM (FRONTIER MARKETS) 697.4 -1.0% 0.2% 17.3% 28.8%

PERU 1,297.7 5.7% 6.7% 17.8% 23.3%

CZECH REPUBLIC 390.6 4.6% -0.6% 5.9% 13.2% GHANA 861.5 -20.3% -33.4% -40.8% -37.8%

GREECE 113.9 -0.2% -9.2% -3.8% 21.0% UKRAINE 92.1 -13.5% 2.5% 21.5% 24.1%

HUNGARY 383.8 -0.2% -17.7% -17.9% -19.5% ARGENTINA 2,350.7 -13.2% 2.1% 14.6% 52.4%

POLAND 855.8 1.6% -6.2% -3.7% 3.8% PAKISTAN 133.6 -9.2% -7.1% 5.3% 12.0%

RUSSIA 648.8 -1.5% -8.2% -17.5% -9.0% JORDAN 94.4 -5.9% -12.5% -0.3% 10.1%

TURKEY 543.3 -3.4% -2.0% 19.1% 15.3% LITHUANIA 936.1 -3.7% -2.7% -4.2% -0.5%

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EGYPT 883.0 8.6% 18.1% 30.7% 67.0% SRI LANKA 258.7 4.2% 8.9% 13.1% 23.3%

SOUTH AFRICA 586.4 1.7% 5.4% 10.8% 20.4% VIETNAM 496.6 6.1% 6.9% 20.3% 26.7%

QATAR 1,109.8 1.2% -11.2% 18.5% 26.1% ZIMBABWE 1,908.3 6.7% 15.2% 3.7% 30.6%

UNITED ARAB EMIRATES 543.9 -0.1% -11.3% 35.2% 68.7% BANGLADESH 925.9 10.9% 13.9% 35.1% 34.4%

• The Equity markets across the globe ended the month of August 2014 on a mixed note. The Developed markets ended higher in the range of 0.2-2.3% with G7 index being a top gainer, up 2.3% (followed by World & Europe, which rose 2% & 0.2% respectively). Emerging markets gained 2.1%, led by EM - Latin America & EM – BRIC, up 7.8% & 3.1% respectively. Growth in EM – Asia was moderate at 0.9%, while EM – Europe and EM - Europe & Middle East underperformed, reporting decline of 1.1% & 0.9% respectively. The Frontier markets, underperformed, falling by 1% during the month.

• Amongst the Frontier markets, Ghana, Ukraine & Argentina were the top losers, which

fell in double digits by 20.3%, 13.5% & 13.2% respectively. Pakistan, Jordan & Lithuania fell by 9.2%, 5.9% & 3.7% respectively. However, the index fall was limited as selective markets like Bangladesh, Zimbabwe, Vietnam & Sri Lanka outperformed, rising by 10.9%, 6.7%, 6.1% & 4.2% respectively.

• Ghana underperformed significantly in August, as the Ghanaian country decided to seek help from the IMF to rescue its economy from collapsing. Ghana is the second sub-Saharan African country to turn to the IMF for help this year, after Zambia announced in June that it would seek talks with the Washington-based multilateral body. The Ghana currency-the cedi has fallen 40% against the US dollar this year, making it the worst-performing currency in Africa. Inflation has shot up from a single digit last year to almost 15% this year, bringing a sharp rise in goods and services in the country. Pressure has been mounting on the John Mahama-led government in recent months with a series of demonstration both home and abroad over unprecedented high cost of living. The government is currently struggling with large current account and budget deficits.

• The Ukraine market fell sharply, as the tensions in the country escalated. Ukraine said that Russia had moved tanks, artillery and troops into war-torn east Ukraine to shore up separatists.

• Dhaka stocks gained significantly as investors (largely institutional) continued their active participation on the trading floor in an expectation that the business situation may witness a positive trend for short term as the political situation remained calm. Improved

Global markets end on a mix note; Developed & Emerging Markets gain, Frontier markets underperform

Ghana & Ukraine pull the Frontier markets lower; but Bangladesh, Zimbabwe & Vietnam restrict index losses

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corporate declarations by the listed companies as well as mutual funds also played an important role behind investors’ enthusiastic participation on the trading floor. Further, decline in banks’ interest on deposit also made investors hopeful that the fund flow from the banking sector to the capital market may increase.

• Amongst the Emerging markets, EM-Latin America & BRIC were the top gainers, up 7.8% &

3.1% respectively. • The gains in the EM – Latin America were led by Brazil, Peru & Mexico, which registered

robust gains of 10.8%, 5.7% & 5% respectively. Colombia grew by 2.1%. However, Chile disappointed, declining by 0.5% during the month.

• Brazilian market outperformed in August as investors are warming up to a possible victory by Marina Silva in Brazil’s presidential election as the popular environmentalist emerges as their best shot at avoiding four more years of President Dilma Rousseff led government they strongly dislike. Stocks are up 10% over the past two weeks, as Silva surges in the race for the Oct 5 election. Investors feel that the Silva government would be very positive for Brazil, both for markets and for the country as a whole.

• Chilean market underperformed on the back of disappointing economic data. Chile's GDP grew at its weakest pace since 2009 in the second quarter as investment waned and a previously rapid expansion in consumer spending slowed. The economy grew 1.9% in the second quarter compared with a year ago, or a seasonally adjusted 0.2% compared with the first quarter. The economy of the world’s biggest copper exporter is slowing after expectations of falling demand for metals sapped investment.

• The gain in the BRIC index was driven largely by Brazil & India (up 10.8% & 2.4%

respectively). China grew marginally by 0.2%. However, Russia underperformed, falling by 1.5%.

• Russian stocks fell during the month on the back of escalating concerns between Russia and Ukraine. Investors are fleeing Russian assets as the crisis in eastern Ukraine is worsening. Russian forces have recently entered Ukraine, with the Ukrainian Ambassador-at-Large warning that Russia could try to drag Ukraine and the West into war. The stocks have fallen on fears that such actions by Russia could result in further tough sanctions on the nation, which could weaken the economic growth. During the month, Switzerland and Japan announced sanctions against the country. Switzerland has added 26 more Russian officials to its black list, while Japan has blacklisted 40 officials and two Crimean companies.

Brazil, Peru & Mexico drive Latin American index; Chile underperforms

BRIC markets up led by Brazil & India; Russia underperforms

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• Among the EM - Asia, Thailand, Taiwan, Philippines & India were the top gainers, up

4.9%, 2.9%, 2.6% & 2.4% respectively. Malaysia & China gained marginally by 0.9% & 0.2% respectively. However, Indonesia & Korea underperformed, falling 1.4% & 0.8% respectively.

• Thai stocks rose as investors built positions in dividend-yielding stocks amid a low interest rate environment. The stocks also rose on hopes of strong earnings amid hopes of political stability. The upmove in the market accelerated as investors bought banking stocks amid economic optimism after the formation of an interim cabinet. It is expected that the new cabinet could speed up the macro recovery started by the fiscal disbursement for the new fiscal year.

• Taiwan stocks rose in August as investor sentiment was buoyed by foreign investor buying in local shares. Taiwan's statistics agency reported the island's jobless rate improved in July to 3.95% on a seasonally adjusted basis from 3.97% in June. July's rate was the lowest since June 2008 when the jobless rate began to climb amid the global financial crisis.

• Indonesian stocks fell as foreign investors sold shares following negative sentiment across the region. Data released showed that Indonesia’s economy in the second quarter grew at the slowest pace since 2009. The stocks also fell amid the Ukraine tension and as Indonesia’s Constitutional Court began hearing on legal challenges from former general Prabowo Subianto who demanded the judge to declare him winner due to alleged vote fraud by President-elect Joko Widodo.

• Among the EM – Europe and Europe & Middle East, Turkey and Russia were the top losers,

down 3.4% & 1.5% respectively in August. Greece, Hungary & UAE fell marginally by 0.2%, 0.2% & 0.1% respectively. However, Czech Republic, Poland & Qatar outperformed, up 4.6%, 1.6% & 1.2% respectively, which restricted further index losses.

• Turkish stocks fell to a five-week low as Fitch Ratings said the election of Prime Minister Recep Tayyip Erdogan as president will do little to improve the country’s credit profile. Political risk in Turkey is set to remain a credit weakness that may lead to a negative rating action, Fitch said in a statement. The stocks also fell on concern that the seizure of two towns in Syria by Islamic State militants will pose risks for businesses operating in the neighboring country.

• Czech market outperformed as the economy’s manufacturing sector registered a strong performance at the start of the second half of the year. Having seen a moderation in

Thailand, Taiwan, Philippines & India drive the EM – Asia index; Indonesia, Korea underperform

Turkey & Russia pull EM – Europe & Middle East index lower; Czech Republic & Poland limit the losses.

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growth of many key indicators in June, the latest data signaled a rebound in momentum. Output, new orders, exports, employment, backlogs and purchasing all rose at faster rates. Meanwhile, the strongest increase in stocks of inputs in nearly seven years reflected firms’ positive expectations regarding the demand outlook.

• Poland rose on hopes that the ruling party's second-in-command Ewa Kopacz would emerge as a likely successor to prime minister Donald Tusk who heads to Brussels in December to become president of the European Council.

• Among the developed markets, US, Ireland & Belgium were the top gainers, up 3.8%, 2.9%

& 2.5% respectively. Switzerland, Canada, Netherlands and Norway also grew at a decent rate in the range of 1.6-2.2% respectively. However, the index gains were restricted due to underperformance from markets like Israel, Italy, Austria, Japan and Singapore, which fell by 3.1%, 2.3%, 2.2%, 2.2% & 2.2% respectively.

• The US markets outperformed in August on the back of better than expected economic data released during the month. U.S. ISM non-manufacturing PMI rose to 41-month high of 58.7 in July. Business activity in the New York City area expanded in July at the fastest pace in eight months. The non-farm productivity rose more-than-expected in the last quarter. The industrial production edged higher in July, as production of auto parts and motor vehicles jumped 10.1%. The U.S. housing recovery gained traction in July as sales of previously owned homes rose to their highest level in 10 months. The number of individuals filing for initial jobless benefits in the week ending August 16 decreased by 14,000 to a seasonally adjusted 298,000 from the previous week’s revised total of 312,000. The stocks also rose on better than expected corporate earnings.

• Irish stocks surged in August as retail sales surged in July on the back of the introduction of the '142' new car registration number plates. The market also inched higher during the month in anticipation of better than expected manufacturing data. As expected, Irish manufacturing expanded at the fastest rate since 1999 in August, as a surge in new orders offered further evidence that the economy is recovering steadily. The Investec Manufacturing Purchasing Managers' Index rose to a 15-year high of 57.3 in August from 55.4 in July, well above the 50 line dividing expansion from contraction and representing the 15th straight month of growth. Ireland, which in December became the first bailed-out euro zone country to exit its rescue programme, has seen a string of positive data and analysts forecast that the economy will grow 3 percent this year after two years of near stagnation.

US, Ireland, Belgium – top gainers amongst the developed markets; Israel & Italy underperform

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• Israel stock market fell on fears of economic slowdown. Judging by the actions of the Bank of Israel, Israel’s central bank, the economy is in worrying shape. The bank’s Monetary Committee, at its monthly meeting on August 25th, cut its main interest rate from 0.5% to 0.25%, the lowest on record. Israeli army’s latest incursion into Gaza, in response to rocket attacks on southern Israel has further accelerated tensions. The hostilities have dented consumption, especially in the southern part of the country, near Gaza. Tourism, which accounts for 7% of Israel’s GDP, has slumped throughout the country, ruining this year’s peak summer season. The finance minister recently admitted that the deficit in next year’s budget will rise to at least 3%. Meanwhile, industrial production has shrunk and most worryingly of all so have industrial exports. (Israel’s exports—many of them software and IT equipment, account for about 40% of GDP).

• Italy underperformed, as the economy slipped into recession for the third time since 2008 in the second quarter, underlining the chronic weakness of the eurozone’s third-largest economy and pressuring the government to complete promised reforms. Italy’s GDP unexpectedly declined by 0.2% in April-June from the previous three months. A Reuters poll of economists had forecast growth of 0.2%.

• Amidst rising geopolitical concerns which have kept on coming up one after another (Ukraine, Gaza, Amreli), US markets performed well in the month of August. The S&P 500 gained 3.8% for August, representing the bench mark’s best August performance since 2000. The S&P also achieved its largest monthly percentage jump since February, when it rose 4.3%. The rise in August is despite Europe weakening and Russia-Ukraine worries.

• The U.S. has seen largely positive economic data and “pretty solid” second-quarter earnings. As soon as the Gaza situation was settled, the Ukrainian conflict and Iraqi conflict in Amerli continues to keep global markets nervous. But the US markets have withstood these hiccups and maintained its buoyancy.

• US stocks are expected to keep advancing through year’s end thanks to earnings growth, though gains won’t be as strong as in the past few quarters.

• US markets reacted positively even as US President Barack Obama announced he had authorised air strikes against Islamic militants in northern Iraq but would not send US troops back to the country. The United States dispatched more advisers to Iraq following

Outlook going forward

Global Market Outlook

US Market Outlook remains buoyant – amidst rising geopolitical concerns

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the decision to begin a series of airstrikes in an effort to protect U.S. personnel and religious minorities from militants.

• Considering the Ukraine crisis, leading American senators have called for the US to send weapons to help Ukraine fight what they say is "a Russian invasion". However President Barack Obama has ruled out U.S. military action over Ukraine and called for a diplomatic solution.

• Encouraged by progress in the U.S. labor market, but uncertain if it is enough, the Federal Reserve Board chairwoman Janet Yellen has so far left the public guessing about when they will start raising short-term interest rates.

• Ukrainian President Petro Poroshenko has warned a "full-scale war" was imminent if

Russian troops continued to advance in support of pro-Moscow rebels, while U.S. and European leaders threatened Moscow with further sanctions. Efforts to halt the violence in eastern Ukraine were very close to a point of no return.

• European Union leaders so far have stopped short of imposing new economic sanctions on Russia in response to the latest developments in Ukraine, instead tasking the organization's executive body to "urgently" prepare tougher economic sanctions that could be adopted within a week after Ukraine's president warned of a possible "full-scale war" in eastern Europe. The 28 leaders of E.U. member countries also issued a statement calling on Russia to "immediately withdraw all its military assets and forces from Ukraine."

• Several European leaders had called for additional sanctions at the outset of the meeting in Brussels, but the fear of an economic backlash apparently prevailed and led the bloc to grant Russia another chance at avoiding tougher action. New sanctions would have required unanimity among the leaders. Russia is the E.U.'s No. 3 trading partner and one of its biggest oil and gas suppliers. The E.U., in turn, is Russia's biggest commercial partner, making any sanctions more biting than similar measures adopted by the U.S. The U.S. and the E.U. have so far imposed sanctions against dozens of Russian officials, several companies as well as the country's financial and arms industry. Moscow has retaliated by banning food imports.

• Recently Iraqi troops and militias aided by U.S. airstrikes broke through a two-month siege of the town of Amerli opening up a humanitarian corridor to thousands of Shiite Turkmen who had been trapped by Sunni militants and deprived of food, water, and medicine. Earlier in August, the U.S. military carried out limited airstrikes and humanitarian aid drops to help Kurdish pesh merga forces open a humanitarian corridor

Warfare Double trouble – Ukraine & Russian conflict and Iraqi Amerli siege

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to thousands of members of Iraq’s Yazidi religious minority, who were trapped by the militants on a mountain range in western Iraq

• Europe's struggle to prevent ultralow inflation from discouraging business investment and

undermining the continent's fragile economy deepened as consumer prices dropped in August to a five-year low. Consumer prices in the euro zone grew 0.3% in August from the previous year down from 0.4% in July and far below the ECB's target of inflation just below 2%.

• Growth in Europe has stalled and inflation is approaching zero. The euro zone’s most immediate problems are rooted in the need for households and businesses to cut debt and in a dearth of demand that has left more than 18 million people in the unemployment line. With the Continent’s three main engines sputtering, the gross domestic product of the 18-nation euro zone did not expand at all from the first quarter of this year, when it grew only 0.2 percent.

• The data on consumer prices keeps pressure on the European Central Bank to take more dramatic stimulus measures to boost demand and inflation and comes just days after ECB President Mario Draghi warned of the risks of investors' falling expectations for consumer-price growth. His remarks were seen as suggesting the ECB is moving closer to large-scale purchases of public and private debt, known as quantitative easing, at a time when the U.S. Federal Reserve is nearing an end of its stimulus program.

• Still the euro zone is one big shock away from deflation. Deflation refers to persistent declines in prices that lead to a vicious cycle of weak profits and declining levels of business investment. The effects have already started to hit several euro zone members, particularly in southern Europe.

• The threat of deflation is more pronounced in Spain, which has a public and private debt load equal to about three times the size of its gross domestic product. Weak or falling prices make it harder for households, businesses and governments to service debts that are typically paid off at fixed interest rates, since incomes and revenues stagnate in a deflationary environment.

• The risk to euro zone growth posed by the Ukraine conflict and stubbornly low inflation should keep the pressure on the European Central Bank to provide further stimulus at some stage, in the coming period.

• Growth in China's large factory sector slipped to a three-month low in August as foreign

and domestic demand cooled raising concerns that the economy is faltering after a

Euro-zone recovery not expected too soon....faces deflation

China’s growth remains rocky

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bounce. The final HSBC/Markit Purchasing Managers' Index (PMI) for China slipped to a three-month low in August, while China's official PMI fell from a 27-month high. The final HSBC/Markit Purchasing Managers' Index (PMI) retreated to 50.2 in August, roughly in line with a preliminary reading of 50.3 and only a shade above the 50-point mark that demarcates an expansion in activity from a contraction.

• The economy still faces considerable downside risks to growth in the second-half of the year, which warrants further policy easing. China's economy has had a rocky spell this year. Growth sunk to an 18-month low of 7.4 percent in the first quarter before edging up to 7.5 between April and June.

• Growth in China's vast factory sector slackened in August as foreign and domestic demand slowed, stoking speculation that further policy easing would be needed to prevent the economy from stumbling once more.

• The economy is healthier than it was in early 2014, but the recovery is tepid and patchy, with housing weakness a weighty anchor on both activity and confidence. The authorities would be wise to stay the course with easier policy settings, especially on the fiscal side.

• The lull in Chinese demand is rippling across the region. South Korea reported exports to China fell in August for a fourth consecutive month on-year, the longest such losing streak in two years, taking some of the shine off a continued recovery in shipments to the United States and the European Union.

• In Japan, the flow of data has shown the economy still suffering the baleful effects of a

sales tax hike in April. Wild swings in consumer spending saw the economy shrink an annualised 6.8 percent in the second quarter, more than erasing the previous quarter's 6.1 percent gain.

• Firms reacted by trimming investment by a seasonally adjusted 1.8 percent in the second quarter, so threatening to end the virtuous cycle of production boosting wages, household income and spending. Yet there was modestly promising news on industrial activity for August. The final Markit/JMMA Japan Manufacturing PMI held at a relatively firm 52.2 in August, up from 50.5 in July.

• In Q1FY15, India’s GDP stood at 5.7% compared to 4.7% in corresponding quarter last

year. Manufacturing sector recorded a growth of 3.5 per cent in the first quarter of 2014-15 as against a contraction of 1.2 per cent in Q1FY14. The mining sector too grew by 2.1

GDP growth at 5.7%...highest in last 8 months...Time to cheer?

Indian Market Outlook

Japan’s economy tentative

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per cent in April-June quarter compared a decline in production by 3.9 per cent the year-ago period. The highest growth rate during Q1FY15 was recorded by financial services sector at 10.4 per cent, followed by electricity gas and water supply at 10.2 per cent. The previous high of GDP growth rate was recorded at 6 per cent in the October-December quarter of 2011-12. The economic growth in preceding quarter (January-March) was 4.6 per cent. The last two years marked the longest spell of growth of less than 5 percent in a quarter of a century.

• The improvement in the latest GDP figures is in large measure due to the steps taken by the previous government to kick-start investments and spur consumer demand, which have led to a revival in manufacturing and mining activity. Year-on-year growth was also helped by a favourable statistical base because of weak economic activity last year.

• Cheering the rebound in India's economy which grew 5.7 per cent in the April-June quarter, highest in the past two-and-a-half years, India Inc expects the GDP to pick up further on the back of conducive investment policies and execution of reforms by government. Expectations are that the GDP will only pick up further and the Indian economy is well poised to reach six per cent or may even cross the six per cent mark for the full financial year 2014-15.

• Quick and pro-active government policies would act as a 'growth propeller', further strengthen business confidence and provide stimulus to growth. However, in order to convert the first signs of revival into a full-fledged recovery, it is necessary that the government continues on its path of implementing the reforms agenda which are necessary to restart the investment cycle and revive demand in the economy.

• Even though Modi is yet to launch big-bang reforms needed to propel the economy back to a near double-digit annual growth, his three-month-old administration has received a big thumbs-up from Indian corporates. He can be credited for reviving business confidence.

• However, without an overhaul of India's strained public finances, stringent land acquisition laws, chaotic tax regime and rigid labour rules, a broader and sustained economic revival will likely remain elusive.

• Prime Minister Narendra Modi in his maiden Independence Day speech spoke on a wide

range of issues, from financial inclusion schemes to stressing on need to enhance manufacturing. In some of the key takeaways from his speech Modi said that for India to make its presence felt on the global stage, there was immediate need to channelise the talent of the youth. He spoke of promoting Brand India and ensuring a better developed

PM’s maiden Independence day address to nation and ongoing Japan visit – focusing on new growth path

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rural India. Big themes included India's pitch as a manufacturing hub, job creation, safety for women, scrapping Planning Commission.

• In a major boost to the manufacturing industry the PM spoke of 'Made in India' products across the world. Modi rightly recognized that the manufacturing sector has been the sole reason for the recent China growth story and India needs to do a lot in this space to catch up. Consumer goods of all kinds with ‘Made in China’ labels are flooding the international market and India needs to soon follow suit by making similar quality products to witness similar economic growth. Further, in his biggest economic announcement to date, he made public the decision to dissolve the National Planning Commission, an archaic Nehruvian socialist institution – a move that brought cheer to economists around the world as it demonstrated Modi’s commitment to bringing about market-based reforms.

• Prime minister Narendra Modi's visit to Japan from August 30 to September 3 heralds an alignment of two powers whose interests are converging in an unprecedented manner in the 'Asian century'. From infrastructure development and high-speed bullet trains to petroleum, gems and jewellery, Modi is keen to propel the bilateral economic relationship with Japan. Japan aims to double its direct investment in India in five years from some $2 billion last year. The two leaders are also likely to agree to speed up talks on a nuclear energy pact.

• Under discussion will be a proposal to formalise a 'two-plus-two' format for talks bringing together the foreign and defence ministers of both countries, and the possible sale of an amphibious aircraft to the India navy. India and Japan will also likely agree to hold regular joint training exercises in maritime defense, some of which will involve the United States as well

• The failure of rains in August over large parts of India has again raised the spectre of

2014 being declared a drought year. While the Met department expects the monsoon to revive in the next few days, the intensity and distribution of rains in the coming fortnight will be crucial. Nearly 36 percent of the subdivisions are facing moderate to severe shortfall of monsoon rains.

• The outlook for the second half of India's four-month monsoon has improved after some above-average rainfall that is also expected to spill over into coming weeks. This is likely to boost final leg of summer crop planting in India, one of the world's big producers and consumers of farm commodities such as rice, corn, soybean, cane and cotton. The dry start to the June-September monsoon season had prompted fears of drought, the first since 2009.

Monsoon to be closely tracked – could 2014 be a drought year?

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• The wet run shrank the rain shortfall to 18 percent below average by Aug. 6. The gap was 22 percent for the first two months of the season that starts in June. A weak monsoon cuts exports, stokes food inflation and can hit demand for products ranging from cars to consumer goods.

• India's farming sector accounts for around 14 percent of the economy, but two-thirds of the nation's 1.2 billion people depend on farming for a livelihood and more than half of its arable land needs summer rains.

• Anti drought measures are well in place down the line. But none of the states have declared a drought so far. The Indian government unveiled a scheme to sell diesel at lower rates to farmers in areas where this year's monsoon rainfall has been less than half. It also raised subsidy on seeds by half for areas where the summer planting started late.

• This year's dry monsoon has given rise to drought fears in grain producing areas of northwest India. But heavy rainfall in some areas has caused landslides and floods.

• The Reserve Bank of India (RBI) kept its key policy repo rate unchanged on August 5 as

widely expected, and voiced a commitment to bringing down inflation that convinced that markets will have to wait until next year for the next cut in rates.

• The RBI left the repo rate at 8.00 percent, as expected. The repo rate has been unchanged since January, when the RBI increased it by a quarter percentage point.

• The upside risks to the target of ensuring CPI inflation at or below 8 percent by January 2015 remain, although overall risks are more balanced than in June. The RBI statement could put to rest any prospect of rate cuts for a while, with many ruling out the chances of any reduction this year.

• The central bank said it would continue to focus on spurring more lending and lowered banks' minimum bond holding requirements, known as the statutory liquidity ratio (SLR), by half a percentage point to 22.0 percent of deposits to free up more money for lending, effective from Aug. 9. The RBI also cut the ceiling on debt that must be held-to-maturity (HTM) by lenders half a percentage point to 24 percent. The RBI retained its economic growth forecast of 5.5 percent for 2014/15, depending on whether monsoons or geo-political tensions intensify.

• RBI Governor Raghuram Rajan in his interview with Central Banking Journal reflected that

the world is at risk of another financial crash following a steep rise in asset prices. “Some of our macroeconomists are not recognising the overall build-up of risks. We are taking a

RBI Governor’s cautious “Asset bubble” prediction for global economy but slightly more positive outlook for Indian banks….

RBI policy – rates unchanged

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greater chance of having another crash at a time when the world is less capable of bearing the cost” he had quoted.

• On the domestic front, Rajan was more positive that India is better prepared to handle the impact of interest rate increases in the United States as foreign funds are less likely to desert the country due to signs of an upturn in economic growth on the heels of U.S. jobs data which has heated up speculation over when the Federal Reserve is likely to raise interest rates.

• Any decision by the Fed to raise rates, which have been held near zero since December 2008, will have implications for economies like India, as it could lead to capital outflows from emerging markets. That could put pressure on emerging market currencies, particularly those with economies running high current account deficits, as India was last summer when talk of the Fed trimming its monetary stimulus led to a sharp depreciation in the rupee. India has since taken action to correct its current account deficit and increase foreign exchange reserves.

• According to Rajan India certainly has done a great deal of preparation and is in a very different position from the summer of 2013. Even when the Fed withdraws, people, after an initial bout of withdrawal, may consider India a good place to leave their money.

• RBI Governor Rajan wants to reduce retail inflation to 6 percent by 2016 from near 8 percent at present, and left interest rates steady early this month, citing inflationary risks from the weak summer monsoon rains.

• While revenue growth improved modestly, a sharp 150bps expansion in Ebitda margins was the biggest surprise in the Q1FY15 results. If this pace of margin expansion continues in rest of the year, margins would return to long-term average from two-decade lows in FY15 itself. Margin expansion coupled with moderation in interest expense growth has resulted in an improvement in financial health of companies. The improvement in profitability has percolated to small cap companies also – in aggregate these companies have reported profits in the June quarter after 4 consecutive quarters of losses.

• Sectorally contrary to other cyclical indicators which suggest a marked improvement in the economy, Q1FY15 results suggest a mixed picture for the economy. Thus revenue growth remained muted (indeed moderated) for the Industrials sector but it accelerated for the Cement sector.

• Aggregate profit growth accelerated sharply with profits growing ~25% y-o-y, the fastest growth in the past few years. The profit cycle was so weak hitherto that aggregate profits had declined in four of the preceding eight quarters. Profit growth was even

Q1FY15 numbers – Modest Revenue growth but EBITDA margins expand

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stronger excluding the financial companies – profits grew 35% ex-financials. At an aggregate level, a significant margin expansion and moderation in interest expense drove the growth.

• Sectorally, profit growth was the strongest for autos, healthcare, and industrials. That said, breadth of profit growth was not strong. Financials, Utilities, Real Estate and Cement all saw a weak profit growth (single digit or negative).

• Post the results for this quarter, consensus has seen a sharp earnings upgrade especially for FY16. Both Sensex/Nifty have seen a ~5% earnings upgrade for FY16 and ~2% upgrade for FY15. Consensus estimates now imply a strong 20% earnings growth for FY16, up from low double digit growth implied for FY15.

• Supreme Court recently ruled that the allocation of more than 200 coal blocks over the

past two decades was illegal. The SC said the allocations were done in arbitrary, non-transparent manner and were against public interest. With nearly 3 trillion rupees at stake, this had a direct effect on the metals and power sector. It also affected banking, which has exposure to the two sectors.

• It disallowed any exploitation of captive mines by ultra mega power plants (UMPP) and has said that commercial usage of captive mines cannot be allowed. It said that the government did not adhere to proper guidelines and no objective criteria were being followed either. It had gone on to say that the consequences of the illegality would be clear on September 9.

• It is not expected that licences for working coal mines would be cancelled as that would result in widespread disruption as well as financial losses and litigation. It’s possible that non-working coal mines could be de-allocated and others may be let off with penalties.

• Markets have been overwhelmed with expectations from the government, assuming that the sentiment flow will wash out any negativity. Agriculture could be a drag along with worsening geopolitical issues across the border with a drought looming large.

• An adverse Supreme Court verdict on coal block allocation could again question the continuity and stability of business in India. The recent bypoll results pointed to a resurgence of marginalized parties. This could change equations with alliance partners in the states coming up for elections in the next few months.

• Prime Minister Narendra Modi’s trip to Japan could also add to the optimism prevailing in the markets with new impetus to infrastructure and defence sectors.

Market could make new highs in September albeit with small corrections. We expect Sensex to trade in the range of 26000-28000

Ruling on coal mines to be watched out for

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• The Q1 data seems to signal a recovery with GDP growth jumping to 5.7 percent. Some sectors did perform exceedingly well with over 10 percent growth. The first is electricity though its size in the overall economy is small. Coal production is unlikely to increase and the power sector will have to fall back on imports. A cyclical recovery seems to have begun but it doesn’t look broad-based.

• With 44% of the total stalled projects in India delayed due to environmental clearances, the environment ministry has been extremely productive over past few months, issuing many notifications aimed primarily at simplifying a host of regulations related to the environment and making the clearance process faster. The environment ministry has issued long delayed clearances to 41 projects since May (8 in coal mining, 11 industrial projects, 11 infrastructure projects, 7 non coal mining projects and 3 thermal power projects). With a simplification and relaxation of regulations, we expect the pace of project clearances to accelerate, moving forward. While articulation of big bang reform is yet to come, we are seeing an urgent focus on policy execution, particularly focused on clearing stalled projects and in attempting to simplify and streamline government processes.

• The increasing concern over the crisis in Ukraine and calls for more sanctions against Russia could play out in the coming weeks. Euro zone growth remains worrisome along with high unemployment. There are expectations of another stimulus in the near future. The European Central Bank meeting on Sept. 4 could provide some clues. Closer home, skirmishes between India and Pakistan have been frequent after the cancellation of talks between the countries, although the markets are yet to take note of them.

• We are in an extended vertical rise and we could see continuation of the uprun led alternately by institutions and non-institutional players (who have come back to life after a long hiatus). While the medium to long term trend still remains positive, we feel the markets have run up sharply in a very short span of time so there could be intermittent small corrections. Brightening outlook for earnings in FY16 could fuel some more fire to the current upmove. Revival of the investment cycle and improving growth are key concerns for both investors and businesses. Recent economic data is positive with a strong improvement in Industrial production, GDP and an increase in auto sales growth. While we believe that markets could time correct in short term, positive earnings momentum and strengthening economic data, gives us comfort on the medium-term uptrend. We expect the BSE Sensex to trade in the range of 26500-27900 in the month of August.

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Technical Commentary:

• After moving into sideways consolidation for the last couple of weeks Nifty managed to rise

on Monday (Sept 01) with an upgap of 35 points registering a sharp upside breakout of the upper band around 7970 levels.

• The upside hurdles of around 7970-8000 levels has been broken sharply and Nifty closed above it.

• Daily momentum oscillator like 14 period RSI has moved up around 70 levels and daily upswing indicator like +DMI has widened by showing a new pivot high around 40 levels (above the high of 37 levels of 19th Aug).

Current Observation: Daily Timeframe:

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• Nifty witnessed a sharp upside breakout of larger sideways consolidation of the last couple of months around 7850 levels during week before last and has sustained above the upper consolidation area of around 7850 levels (orange horizontal line) during last week.

• We observe a formation of variation candlestick pattern of ‘advance block’ as well as ‘hanging man’ in last week, which is signaling a tiring type pattern after a sharp upmove.

• Though we observe a sharp upmove in Nifty since June 2014, the volume decreased consistently in line with the upmove of Nifty.

Weekly Timeframe

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• We also observe a formation of negative divergence pattern in the weekly 14 period RSI, which is making lower highs in line with the higher high formations of Nifty as per weekly chart.

• The weekly upswing indicator like +DMI line is showing a sharp divergence with Nifty over the last 3-4 months (Nifty showed higher highs and +DMI showed lower highs).

• Weekly trend strength indicator like ADX has reached the crucial upper levels of around 48 levels.

Nifty Monthly timeframe

• We observe a continuation of up trended moves and new high formations in Nifty as per

larger timeframe like monthly. • After the formation of stalled type pattern in the month of July-14, Nifty continued its

uptrend in August-14 and has almost reached the 8000 mark. • After staging a decisive upside breakout of the major consolidation pattern around 6350

levels (brown horizontal line) during March-14, Nifty witnessed an excellent upmove for the next four months.

• The 1x1 up angle line of larger degree (pink up sloping line which is connected from the major bottom of 920 -May-03) is being hit repeatedly by the Nifty for the last four months.

• Monthly 14 period of RSI, which is in a bullish high low range of 75/80-40 levels has reached the upper bullish range of 75-80 levels (currently at 77 levels).

Monthly Timeframe

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• The sharp upside breakout of the consolidation on Monday (Sept) is hinting at the possibility of continuation of upmove in Nifty.

• Daily momentum oscillators and also trend strength indicator (RSI & +DMI) are in a good shape suggesting strength of upswing as per smaller timeframe.

• The formation of variation candlestick pattern of hanging man and advance block in Nifty as per weekly timeframe is echoing the cautious approach at the important higher levels of 8000. Nifty opening strongly during early this week is suggesting a wait and watch approach till we see weekly closing on Friday.

• The formation of sharp divergence in volume pattern (as per weekly and monthly timeframe chart-Nifty moving sharply up with declining volumes) is not a good sign for bulls to push prices further highs. This suggests lesser participation on new high formations. At some point of time this divergence could result in an important high formation in Nifty.

• The formation of another negative divergence in weekly +DMI is signaling that upside momentum as per larger timeframe is gradually losing its strength. Previously, few such divergences in this indicator have resulted in meaningful high formations.

• In the last 10-11 years, weekly ADX has made a peak above 50 levels once and rest of the occasions it has formed tops below 50 levels (tops-signaling the completion of a significant trends and subsequent trend reversals or mature). Currently weekly ADX reaching a high of around 48 levels is also convincing factor to believe yet another mature of larger trend could be in store.

• Larger timeframe like monthly is highlighting an excellent intermediate upside breakout in March-14 around 6350 levels and sharp follow through up moves post breakout. This is normal valid upside breakout and there is no formation of any sort of reversal type candlestick pattern yet so far (as per monthly timeframe).

• Nifty continuously hitting the upper slope of 1x1 up angle line of larger degree (pink up trended angle line) is raising concerns over the continuation of sharp upmoves from here.

• The detailed study of smaller to larger timeframe (from daily to monthly) is indicating the dominating nature of bulls. A careful observation of weekly and monthly timeframe charts is hinting that we are unlikely to see any significant upmoves from here.

• One may adopt cautious approach at the higher levels and look to book profit from long positions on any rise from here. The maximum extent of further upmoves from here could be around 8215 levels (which is 1.618% from the low high and low of 14th July, 25th July and 8th Aug, taken from the 25th July high).

Conclusion

Summing Up

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• The quantum of downside can be calculated only after the confirmation of the top reversal pattern as per larger timeframe.

Learning Technical Analysis

• Carrying on from our last article which covered the first two major components of a quantitative trading system (Strategy Identification and Strategy Backtesting), this article focuses on the remaining two components –

1. Execution System - Linking to a brokerage, automating the trading and minimising transaction costs

2. Risk Management - Optimal capital allocation, "bet size"/Kelly criterion and trading psychology

• An execution system is the means by which the list of trades generated by the strategy are

sent and executed by the broker. Despite the fact that the trade generation can be semi- or even fully-automated, the execution mechanism can be manual, semi-manual (i.e. "one click") or fully automated. For LFT strategies, manual and semi-manual techniques are common. For HFT strategies it is necessary to create a fully automated execution mechanism, which will often be tightly coupled with the trade generator (due to the interdependence of strategy and technology).

• The key considerations when creating an execution system are the interface to the brokerage, minimisation of transaction costs (including commission, slippage and the spread) and divergence of performance of the live system from backtested performance.

• There are many ways to interface to a brokerage. They range from calling up your broker on the telephone right through to a fully-automated high-performance Application Programming Interface (API). Ideally you want to automate the execution of your trades as much as possible. This frees you up to concentrate on further research, as well as allow you to run multiple strategies or even strategies of higher frequency (in fact, HFT is essentially impossible without automated execution). The common backtesting software outlined above, such as MATLAB, Excel and Tradestation are good for lower frequency, simpler strategies. However it will be necessary to construct an in-house execution system written in a high performance language such as C++ in order to do any real HFT.

• Another major issue which falls under the banner of execution is that of transaction cost minimisation. There are generally three components to transaction costs: Commissions (or tax), which are the fees charged by the brokerage, the exchange and the SEBI (or similar

Execution Systems

Part 2 – Your Guide to Quantitative Trading (Contd. From last month)

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governmental regulatory body); slippage, which is the difference between what you intended your order to be filled at versus what it was actually filled at; spread, which is the difference between the bid/ask price of the security being traded. Note that the spread is NOT constant and is dependent upon the current liquidity (i.e. availability of buy/sell orders) in the market.

• The final major issue for execution systems concerns divergence of strategy performance from backtested performance. This can happen for a number of reasons. There may be bugs in the execution system as well as the trading strategy itself that do not show up on a backtest but DO show up in live trading. The market may have been subject to a regime change subsequent to the deployment of your strategy. New regulatory environments, changing investor sentiment and macroeconomic phenomena can all lead to divergences in how the market behaves and thus the profitability of your strategy

• The final piece to the quantitative trading puzzle is the process of risk management. "Risk" includes technology risk, such as servers co-located at the exchange suddenly developing a hard disk malfunction. It includes brokerage risk, such as the broker becoming bankrupt (not as crazy as it sounds, given the not so recent scare with MF Global!). In short it covers nearly everything that could possibly interfere with the trading implementation, of which there are many sources.

• Risk management also encompasses what is known as optimal capital allocation, which is a branch of portfolio theory. This is the means by which capital is allocated to a set of different strategies and to the trades within those strategies.

• The industry standard by which optimal capital allocation and leverage of the strategies are related is called the Kelly criterion. The Kelly criterion makes some assumptions about the statistical nature of returns, which do not often hold true in financial markets, so traders are often conservative when it comes to the implementation.

• Another key component of risk management is in dealing with one's own psychological profile. There are many cognitive biases that can creep in to trading. Although this is admittedly less problematic with algorithmic trading if the strategy is left alone! A common bias is that of loss aversion where a losing position will not be closed out due to the pain of having to realise a loss. Similarly, profits can be taken too early because the fear of losing an already gained profit can be too great.

• Another common bias is known as recency bias. This manifests itself when traders put too much emphasis on recent events and not on the longer term. Then of course there are the classic pair of emotional biases - fear and greed. These can often lead to under- or over-

Risk Management

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leveraging, which can cause blow-up (i.e. the account equity heading to zero or worse!) or reduced profits.

Derivatives Commentary:

• The month of Aug 2014 saw the Nifty scaling new life highs after sliding in the early part of the month. M-o-M, the Nifty gained 3.02%.

• In the F&O space, the FIIs were net buyers in the Index Futures segment of Rs.1338 cr (vs net buyers of Rs.323 cr in Jul 2014). Along with the increase in the open interest, it indicates long positions were undertaken by FIIs in index futures segment. In the index Options segment, the FIIs were net buyers of Rs.11062 cr (vs net buyers of Rs.3576 cr in Jul 2014), which was accompanied with a small rise in open interest. In the Stock Futures segment, FIIs were net buyers of Rs.5569 cr (vs net buyers of Rs.5066 cr in Jul 2014), while open interest fell over July.

• The Sept 2014 series has started on a heavier note compared to the previous series. In terms of value, the Sept 2014 series has begun with market wide OI at Rs.66,400crs. Vs. Rs.64,100crs. at the beginning of the Aug 2014 series. It was Rs.69,200crs. at the beginning

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of the July 2014 series. This increase in OI indicates that traders have become more aggressive and are expecting further upsides in the market. This is despite the fact that historically, September has been a weak month for equity markets.

• Looking at the rollover data, we observe that rollover figures were higher implying that traders carried forward their bullish bets into the Sept series on expectations the market could continue to head higher in the coming weeks.

• While Nifty rollover was at 73% as against the three month average of 66%, Market wide rollover was at 79% Vs. the three month average of 76%.

• It seems the expectations of stronger economic growth numbers and the onset of the festive season have prompted traders to create long positions. Sectorally, IT, Pharma, Oil and Gas and Auto stocks saw the most rollovers.

• Coming to stock specific action, strong long rollovers were seen in Bajaj Auto (73%), Tata Motors (77%), Titan (94%), ONGC (87%) and Reliance (89%). Short rollovers were however seen in metal stocks like JSPL, Tata Steel and Hindalco after the Supreme Court termed all coal blocks allotted since 1993 as illegal. Capital good sectors too witnessed short rollovers after companies failed to meet Q1 result expectations.

• Reflecting the declining volatility expectations and the fact that markets are trending, the Nifty IV has dipped to 13.56% at the start of the Sept series from 14.56% at the beginning of the Aug series. The Nifty OI PCR slid marginally to 0.79 at the start of the Sept series from 0.8 at the start of the Aug series. The fall in the OI PCR indicates a greater buildup of calls in the market.

• Technically, the Nifty is now in a short term uptrend after breaking out of an upward sloping trend line that held down the recent highs of the index.

• Index option activity is suggesting a trading range of 7800-8200 in the near term. This is because the maximum Call OI is currently being seen in the 8100-8200 strikes indicating this is the maximum expected upside for the Nifty in the near term. In the put segment, maximum OI is currently being seen in the 7900-7800 puts, suggesting this is the maximum risk on the downside for the near term.

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• The ratio spread is a neutral strategy in options trading that involves buying a number of options and selling more options of the same underlying stock and expiration date at a different strike price. It is a limited profit, unlimited risk options trading strategy that is taken when the options trader thinks that the underlying stock will experience little volatility in the near term.

• When to use: Usually entered when market is near A and user expects a slight to moderate rise in market but sees a potential for sell-off. One of the most common option spreads, seldom done more than 1:3 (two excess shorts) because of upside risk. Profit:

• Max Profit = Strike Price of Short Call - Strike Price of Long Call + Net Premium Received - Commissions Paid

• Max Profit Achieved When Price of Underlying = Strike Price of Short Calls • Loss: • Maximum Loss = Unlimited • Loss Occurs When Price of Underlying > Strike Price of Short Calls + ((Strike Price of Short

Call - Strike Price of Long Call + Net Premium Received) / Number of Uncovered Calls) • Loss = Price of Underlying - Strike Price of Short Calls - Max Profit + Commissions Paid • Breakeven: • Upper Breakeven Point = Strike Price of Short Calls + (Points of Maximum Profit / Number of

Uncovered Calls) • Lower Breakeven Point = Strike Price of Long Call +/- Net Premium Paid or Received

Learning Derivatives Analysis

Ratio Call Spread

Buy 1 ITM Call Sell 2 OTM Calls

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• The put ratio spread is a neutral strategy in options trading that involves buying a number of put options and selling more put options of the same underlying stock and expiration date at a different strike price. It is a limited profit, unlimited risk options trading strategy that is taken when the options trader thinks that the underlying stock will experience little volatility in the near term.

• When to use: Usually entered when market is near B and you expect market to fall slightly to moderately, but see a potential for sharp rise. One of the most common option spreads, seldom done more than 1:3 (two excess shorts) because of downside risk.

• Profit: • Max Profit = Strike Price of Long Put - Strike Price of Short Put + Net Premium Received -

Commissions Paid • Max Profit Achieved When Price of Underlying = Strike Price of Short Put • Loss: • Maximum Loss = Unlimited • Loss Occurs When Price of Underlying < Strike Price of Short Puts - ((Strike Price of Long Put

- Strike Price of Short Put + Net Premium Received) / Number of Uncovered Puts) • Loss = Strike Price of Short - Price of Underlying - Max Profit + Commissions Paid • Break Even: • Upper Breakeven Point = Strike Price of Long Put +/- Net Premium Received or Paid • Lower Breakeven Point = Strike Price of Short Puts - (Points of Maximum Profit / Number of

Uncovered Puts)

Buy 1 ITM Put Sell 2 OTM Puts

Ratio Put Spread

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Extract of Calls during August 2014

Index Futures Calls

Date B/S Trading Call Entry at Sloss Targets Exit Price

/ CMP Exit Date % G/L Comments Time Horizon Avg. Entry Abs.

Gain/Loss

27-Aug-14 B Nifty Aug Fut 7935 7909 7980 7953.0 28-Aug-14 0.2 Premature Profit Booked 1-2 Days 7935 18

6-Aug-14 S Nifty Aug Fut 7724.9 7760 7670 7705.0 6-Aug-14 0.3 Premature Profit Booked 1-5 days 7724.9 19.9

4-Aug-14 B Nifty Aug Fut 7710 7660 7810 7738.0 5-Aug-14 0.4 Premature Profit Booked 1-5 days 7710 28

25-Aug-14 S Nifty Future 7964.45 8001 7925 7935.1 25-Aug-14 0.4 Premature Profit Booked 2-3 days 7964.45 29.35

11-Aug-14 B Nifty Future 7644.95 7608 7700 7699.7 12-Aug-14 0.7 Premature Profit Booked 2-3 days 7644.95 54.75

8-Aug-14 B BANK Nifty Future 14786.5 14699 14940 14856.0 8-Aug-14 0.5 Premature Profit Booked 2-3 days 14786.5 69.5

Stock and Nifty Options Calls

Date B/S Trading Call Entry at Sloss Targets Exit Price /

CMP Exit Date % G/L Comments Time Horizon Avg. Entry Abs.

Gain/Loss

28-Aug-14 B Tata Motors DVR 380 Call 2.5 1.45 5 3.8 28-Aug-14 50.0 Premature Profit Booked 2-3 days 2.5 1.25

28-Aug-14 B ONGC 435 Call 1.8 0.95 3 1.0 28-Aug-14 -44.4 Exit 2-3 days 1.8 -0.8

26-Aug-14 B BHEL 210 Put Sept 5.5 2.9 10 6.9 26-Aug-14 25.5 Premature Profit Booked 3-5 days 5.5 1.4

22-Aug-14 B Bank of Baroda 940 Call 10 6.5 20 14.0 22-Aug-14 40.0 Premature Profit Booked 1-5 Days 10 4

14-Aug-14 B BANKNIFTY 15200 Call 173 120 260 225.0 18-Aug-14 30.1 Premature Profit Booked 1-3 Days 173 52

4-Aug-14 B Cairn 320 Call 7.85 5.3 15 5.3 8-Aug-14 -32.5 Stop Loss Triggered 1-5 Days 7.85 -2.55

4-Aug-14 B INFY 2450 Call 84 55 130 100.0 4-Aug-14 19.0 Premature Profit Booked 1-5 Days 84 16

4-Aug-14 B Coal India 350 Put 8.3 5.3 17 7.1 4-Aug-14 -14.5 Exit 1-3 Days 8.3 -1.2 Update of Trading BTST / STBT/ Future Calls

Date B/S Trading Call Entry at Sloss Targets Exit Price /

CMP Exit Date %

G/L Comments Time Horizon Avg.

Entry Abs.

Gain/Loss

26-Aug-14 B Just dial 1736.85 1675 1850 1675.0 28-Aug-14 -3.6 Stop Loss Triggered 5 Days 1736.85 -61.85

27-Aug-14 B Nocil 33.35 31.7 36.5 34.8 28-Aug-14 4.3 Premature Profit Booked 2-3 days 33.35 1.45

27-Aug-14 B CCL Prodcuts 87, 88.9 85 100 95.4 27-Aug-14 7.3 Premature Profit Booked 2-3 days 88.9 6.5

25-Aug-14 B Indus Ind Bank 574.9 562 600 562.0 26-Aug-14 -2.2 Stopped Out/Exit 1-5 days 574.9 -12.9

22-Aug-14 B GAEL 58 65 55 61.4 22-Aug-14 5.9 Premature Profit Booked 2-3 days 58 3.4

21-Aug-14 B Titan 358 346 385 368.0 21-Aug-14 2.8 Premature Profit Booked 1-5 days 358 10

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20-Aug-14 B Inseticid 561.5 539 595 575.9 20-Aug-14 2.6 Premature Profit Booked 2-3 days 561.5 14.4

13-Aug-14 B Indrameddco 45.25 42 49.25 46.4 19-Aug-14 2.5 Premature Profit Booked 2-3 days 45.25 1.15

13-Aug-14 B Make 297, 307.45 290 353 317.0 14-Aug-14 4.9 Premature Profit Booked 2-3 days 302.25 14.75

14-Aug-14 B Finpipe 282 270 300 292.9 14-Aug-14 3.9 Premature Profit Booked 2-3 days 282 10.9

12-Aug-14 B Blue Star 308 297 340 297.0 12-Aug-14 -3.6 Stop Loss Triggered 3-7 Days 308 -11

8-Aug-14 B Wondrela 220.6 214 237 231.6 8-Aug-14 5.0 Premature Profit Booked 2-3 days 220.6 11

7-Aug-14 B Kopran 53.5 50.5 60 55.0 7-Aug-14 2.7 Premature Profit Booked 2-3 days 53.5 1.45

5-Aug-14 B Aarti Ind 228, 237.70 223.5 255 244.7 6-Aug-14 2.9 Premature Profit Booked 2-3 days 237.7 7 Positional Calls

Date B/S Trading Call Entry at Sloss Targets Exit Price /

CMP Exit Date %

G/L Comments Time Horizon Avg.

Entry Abs.

Gain/Loss

6-Aug-14 B BHEL 234 222 260 222.0 8-Aug-14 -5.1 Stop Loss Triggered 5-7 days 234 -12

19-Aug-14 B Manaapuram 21.6, 23.75 20.9 30 25.4 19-Aug-14 6.7 Premature Profit Booked 5-7 days 23.75 1.6

21-Aug-14 B Gitanjali Gems 72 - 70 68 80 75.7 22-Aug-14 5.1 Premature Profit Booked 3-7 days 72 3.7

21-Aug-14 B Bharat Gear 67.5 - 59.3 58 76 73.6 21-Aug-14 9.0 Premature Profit Booked 3-7 days 67.5 6.1

22-Aug-14 B SPARC 190 - 185 178 220 205.0 25-Aug-14 7.9 Premature Profit Booked 3-10 days 190 15

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Gainers & Losers – August 2014

Price Price % chg 31-Jul-14 28-Aug-14

TATAMTRDVR 294.00 377.25 28.32

VOLTAS 192.25 244.65 27.26

ARVIND 230.65 286.70 24.30

BPCL 580.15 694.30 19.68

M&MFIN 235.25 279.30 18.72

HAVELLS 239.59 284.20 18.62

TATAMOTORS 446.75 525.05 17.53

M&M 1201.65 1407.20 17.11

APOLLOHOSP 1013.20 1173.20 15.79

AUROPHARMA 712.20 817.55 14.79

Price Price % chg 31-Jul-14 28-Aug-14

JPPOWER 18.95 14.15 -25.33

JPASSOCIAT 58.45 46.50 -20.44

RPOWER 92.50 74.55 -19.41

SUNTV 424.75 352.20 -17.08

SYNDIBANK 143.65 119.35 -16.92

ADANIPOWER 56.60 47.20 -16.61

JINDALSTEL 274.80 233.00 -15.21

IDBI 89.15 75.95 -14.81

UNITECH 25.45 21.70 -14.73

RCOM 135.05 116.00 -14.11

Price Price % chg 31-Jul-14 28-Aug-14

GHCL 58.95 91.50 55.22SONATSOFTW_T 76.70 114.75 49.61

BIRLACORPN 379.55 545.90 43.83

BASF 835.30 1190.75 42.55

WHIRLPOOL 340.40 471.50 38.51

SHASUNPHAR 157.75 206.60 30.97

AARTIIND 215.05 280.70 30.53

HSIL_T 243.80 310.40 27.32

SUNDRMFAST 104.95 133.60 27.30

VOLTAS 192.25 244.65 27.26

Price Price % chg 31-Jul-14 28-Aug-14

BHUSANSTL 394.75 101.40 -74.31

PRAKASH 112.10 69.50 -38.00

ERAINFRA 21.45 15.50 -27.74

JPPOWER 18.95 14.15 -25.33

SKUMARSYNF 6.05 4.55 -24.79

IBPOW 11.60 9.05 -21.98REIAGROLTD_T 3.50 2.75 -21.43

FINANTECH 319.80 253.90 -20.61

JPASSOCIAT 58.45 46.50 -20.44

DEN 208.70 166.25 -20.34

Top Gainers From F&O Top Losers From F&O Top Gainers From CNX 500 Top Losers From CNX 500

RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate OfficeHDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com Disclaimer: This document has been prepared by HDFC securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for non-Institutional Clients only.