Investment Outlook , Published Jan 18, 2018
Nifty
After two consecutive flat years, bulls clearly took charge of the market in 2017, as the Nifty50 rallied 29% last year. The positive momentum in global equity markets has also been supportive of our markets. Though foreign flows were good last year with more than Rs. 51 thousand crores buying, domestic mutual funds have been the main drivers with a net investment of Rs. 1.19 lakh crore. It has been a broad-based rally with small and mid-cap indices rallying 40% and 48% respectively, outperforming the large-caps. Post the demonetization low of 7894 in the month of December 2016, the Nifty50 has been in a strong uptrend, with a higher-top-higher-bottom formation on the charts. In the months of August and September, the market did witness minor hiccups, but it rallied swiftly to hit a high of 10490 levels in the month of November. As seen in the below chart, the index is facing resistance at the rising trend-line, connecting the highs of 8969 (September 2016) and 10138 (August 2017). The declines from this resistance trendline have been of a corrective nature and is maintaining higher-lows formation. Now the market has a critical support level at 9685 levels, which was the double-bottom-low of August-September. A key risk to watch is INDIA VIX; a measure of volatility having a negative correlation with Nifty. Though VIX has seen a fall after its December peak, its rise will add pressure to the markets. Further strengthening of Crude oil prices could become a dampener. Despite these concerns, the broader market is still in a strong uptrend, and for any strong trend reversal, the downside index should breach 9685 levels. If that happens, the market may see a deeper correction that can lead to the start of a lower-top-lower-bottom formation which will be negative in the medium term. Considering the fact that Nifty50 is in a broader uptrend, a sustained move beyond the 10490-10580 levels could lead to a rally towards 11200-11500 levels in the medium term.
Currencies – INR/USD
The Rupee saw a sharp appreciation against the U.S. Dollar from 68.9 levels in November 2016 to 63.6 in August 2017. Then the currency witnessed a bout of depreciation in the month of September when it quickly fell to 65.9 levels. Since then it has appreciated to 63.8. Now the Rupee has strong resistance at 63.5 levels, where 50% retracement comes from the major swing of 58.2 in May 2014 to 68.9 levels in February 2016. If the Rupee strengthens beyond 63.5 levels on a sustainable basis then a rally can be seen towards 62.30 and then possibly towards 60.5 levels. Holding 63.5 levels, the Rupee may see a reversal and depreciate initially towards 65.2 levels. Sustaining above 65.2 levels, the Rupee may see further depreciation towards 65.9-66.2 levels.
Investment Outlook 2018