Chartwatchers - Emerging Markets Huddle To Triumph Over Volatility

Chart-Watchers Jan 2019
Emerging Markets Huddle to Triumph Over Volatility
Sagar Doshi Joaquim Fernandes Ankit Narshana

Chief Manager (Research Analyst) Research Analyst Research Analyst
91 (22) 4088 5757 Ext.6226 +91 (22) 4040 6130 +91 (22) 4040 7596
Sagar.doshi@edelweissfin.com joaquim.fernandes@edelweissfin.com ankit.narshana@edelweissfin.com Date: 18th January 2019
Edelweiss Professional Investor Research
ChartWatchers – “Emerging Markets Huddle to Triumph Over Volatility”

Sagar Doshi
Chief Manager (Research Analyst)
 2018 was the year of increased volatility and uncertainty among the global markets.
91 (22) 4088 5757 Ext.6226 As most equity markets witnessed sharp corrections, few emerging markets like
Sagar.doshi@edelweissfin.com
Brazil, Russia and India remained sturdy closing the year marginally positive.
Ankit Narshana Emerging markets could come into light in 2019 as they have stood the storm of
Research Analyst
+91 (22) 4040 7596
volatility in the previous year and formed their respective base.
Ankit.narshana@edelweissfin.com
 India notches higher in term of market capitalization as Germany market cap erodes
Joaquim Fernandes 20% in 2018. This brings India in 7th position just after France whose market cap
Research Analyst
+91 (22) 4040 6130 stands at 2.2tn vis-a-vis of India’s 2.1tn.
Joaquim.fernandes@edelweissfin.com
 We believe that the U.S. Dollar could face headwinds, as the pace of Fed tightening
is likely to slowdown. From an Elloitt wave perspective, the DXY is currently in wave
C, which as per our count will terminate between 98.0-98.5, from where the index
is likely to begin its new leg lower towards 92-90.
 Comparing Emerging market vs Dollar Index chart it shows that both are inversely
correlated.As we expect dollar index to correct in 2019, EM’s should benefit.
 Ratio chart of equal weighted emerging market to equal weighted Developed

market is broekn out of its four year consolidation. A sustained breakout on the
upside will indicate EM’s outperforming DM’s
 Ratio of Dollar denominated Indian equity to world equties which had been
outperforming since 2001 is under consolidation since four years. Recently ratio has
tested lower end of the range and is now moving higher indicating Indian equity to
outperform world equities.
 Ratio chart of S&P 500/Precious metals indicates, Bullion could start its
outperformance over equities. Added to this Industrial metal index seems to be in
its last leg of downmove which should than be followed by a reversal on the upside.
As indicated in the earlier editions of chartwatchers starting 2017, we still continue
to hold our long term view of 12,100 level using Elliot wave theory.
 Sectors which we like are Pharma, Paints, Infra & Realty

Focus stocks for trading
Long ideas – Berger Paints, Concor , Axisbank
Short Ideas - Apollotyre
Date: 18th January, 2019
1 Edelweiss Professional Investor Research – Trading Desk

Rising India – Surviving a volatile year
Total Current Market Cap FII NET Flow
Current YTD Abs 2017 FII Net Flow In % of
Country Market on 1st Jan 2018 Pct Chg in Debt
Rank chg Rank Equity USD Bn Total Mcap
Cap (USD tn) (USD tn) USD Bn
1 UNITED STATES 27.1 29.6 -2.6 -8.7% 1 -106 -0.4% 355
2 CHINA 5.5 7.7 -2.3 -29.3% 2 8 0.1% 72
3 JAPAN 5.4 6.3 -0.9 -14.5% 3 -46 -0.8% 36
4 HONG KONG 4.8 5.4 -0.5 -10.2% 4
5 BRITAIN 3.1 3.8 -0.7 -19.1% 5 9 0.3% 80
6 FRANCE 2.2 2.5 -0.3 -12.0% 6 -8 -0.4% 78
7 INDIA 2.1 2.4 -0.3 -13.0% 8 -4 -0.2% -7
8 GERMANY 2.0 2.4 -0.5 -19.0% 7 1 0.1% -18
9 CANADA 1.9 2.3 -0.4 -18.2% 9 14 0.7% 47
10 SWITZERLAND 1.5 1.8 -0.3 -16.0% 10 -9 -0.6% 0
11 SOUTH KOREA 1.4 1.7 -0.3 -20.1% 11 -6 -0.5% 46
12 AUSTRALIA 1.2 1.4 -0.2 -17.4% 12
13 TAIWAN 1.1 1.2 -0.1 -12.3% 13 -12 -1.1%
14 BRAZIL 0.8 0.9 -0.0 -5.5% 14 -3 -0.3% 4
15 SWEDEN 0.7 0.8 -0.1 -13.9% 16
16 SPAIN 0.7 0.8 -0.1 -17.4% 15
17 ITALY 0.6 0.7 -0.1 -17.9% 17 1 0.1% -56
18 RUSSIA 0.6 0.6 -0.0 -5.4% 19 3 0.5% 0
19 SAUDI ARABIA 0.5 0.5 0.0 10.5% 20
20 NETHERLANDS 0.5 0.6 -0.1 -21.0% 18 15 3.1% -14
Total / Average 63.4 73.5 -10.1 -14.0% -144 622
India is the only nation among the top 10 countries according to market capitalization who has
moved higher in ranking this year inspite of having an outflow from the FIIs of 4.5 billion USD.
India climbing up in Germany has seen an errosion of 20% of its market cap while India has corrected 13% and repalced
terms of market germany. Another 5% outperformance with global markets could put us 6 th on the list. based on
capitalization
the below analysis in the report, we feel the cyclical trade will soon play-out and could put
emerging markets in lead in late 2019.
Valuation Perespective : PE Ratio of Emerging Markets V/S Developed Markets

40
35
30
25
16.84
20
15
EM valuations near 10 10 11.35
5
year lows, better off 0
compared to DMs
01-12-2008
01-03-2009
01-06-2009
01-09-2009
01-12-2009
01-03-2010
01-06-2010
01-09-2010
01-12-2010
01-03-2011
01-06-2011
01-09-2011
01-12-2011
01-03-2012
01-06-2012
01-09-2012
01-12-2012
01-03-2013
01-06-2013
01-09-2013
01-12-2013
01-03-2014
01-06-2014
01-09-2014
01-12-2014
01-03-2015
01-06-2015
01-09-2015
01-12-2015
01-03-2016
01-06-2016
01-09-2016
01-12-2016
01-03-2017
01-06-2017
01-09-2017
01-12-2017
01-03-2018
01-06-2018
01-09-2018
Price Earnings Ratio (P/E) (MXEF Index) Price Earnings Ratio (P/E) (MXWO Index)
Source: Edelweiss Professional Investor Research.

While developed market and emerging markets both faced sever P/E derating Emerging markets
P/E ratio is nearing to its 10 year lows of 9.7 times. This suggest that valuations for emerging
markets have cooled off much more than the developed markets and thus EM’s could be the
better place to stay invested.

The year for Emerging Markets?
Dollar Index: At the vicnity of reversing trend
Bearish dollar to benefit

emerging nations
Source: Bloomberg, Edelweiss Professional Investor Research.
The dollar index (DXY) has traded with a positive bias this year, underpinned by policy divergence
between the U.S. and other developed economies. However, we believe that the U.S. currency
could face headwinds in the coming months, as the pace of Fed tightening is likely to slowdown.
From an Elloitt wave perspective, the DXY is currently in wave C, which as per our count will
terminate between 98.0-98.5, from where the index is likely to begin its new leg lower towards
92-90.
Dollar Index vs MSCI Emerging:
Dollar Index have inverse

correlation with MSCI
emerging markets
The above chart compares dollar index (Upper panel) vs MSCI Emerging market index (Lower
panel). The observation is that both the indices are inversely correlated to each other. A top in
dollar index usually is followed by bottom in emerging markets. Currently as we expect dollar
index to mark a top around 98-98.5 we could see reversal in emerging markets.

Emerging market/ Developed market (Equal weighted) ratio chart:
Emerging/developed
markets ratio broken out
of a 4 year range hinting
emerging markets are
taking the lead.
As we expect emerging market to see a reversal, above is the chart of emerging market divided by
Developed market. As we can see, since 4 years ratio has been trading in the range with horizontal
tops and successively higher lows. As prices have broken out of a 4 year consolidation we can see
emerging markets taking the lead from here on.
Dollar denominated – Sensex to world Equities (Equal weighted)
Dollar denominated
Sensex indicates its
outperformance over
world equities
As from the above few charts we are expecting emerging markets to outperform developed
market, above is the ratio chpart of dollar denomiated sensex divided by world equities. As we can
see index has been conslidating since more than 3 years and ratio has now come to the lower end
of the range. We expect ratio to move upward and test the higher end of the range of break above
it, which will suggest India outperfomance over world equity markets.

1) Emerging Market (BRICS) Equal weighted chart
Emerging market equal

weighted charts
currently in 4th wave
should begin its final leg
of up move.
Above is the equal weighted charts of Emerging markets. With the help of elliot wave theory chart
tells us that index is undergoing consolidation phase which is ideally should be followed by an
impulsive move on the upside. As per wave equality if index resumes uptrend, we could see 15%
on the upside. Also the ratio currently trades at its all time highs.
2) MSCI Emerging Market Index and USD/CNY
Dollar vs YUAN’s
negative correlation
should underpin EMs if
Dollar peaks.
Above chart is the comparision of chinese yuan and MSCI Emerging markets. Observe that the two
have consistently had a negative correlation. A strengthening yuan increases inflows across
emerging markets, in turn lifting the MSCI EM index higher, while a weakening yuan has an
opposite impact. The orange line above is USDCNY. Notice that the pair is showing signs of topping
right near the previous peak in 2016, signaling that the weakness in yuan could be nearing an end.
A move lower in the pair in the days ahead is likely to underpin EMs.

World Markets
U.S.: In the late expansion stage of a business cycle
In our previous chartwatchers edition, we wrote of credit spread and yield curve, wherein we had mentioned that the U.S. economy is
in a late-expansion phase. Now, let us further look at three U.S. charts which shows that US despite being in late expansion phase there
is still no signs of weakness.
1) U.S. employment report: 2) U.S. Leading Economic Index (LEI):
3) U.S. Consumer Confidence: Employment is a lagging data, but when smoothened out
over a longer time-horizon, it can provide valuable
information. Notice in chart 1 that each of the past 3
recessions were preceded by the 10-month MA of the U.S.
jobless rate cutting above the 20-month MA at nearly the
same time the U.S. economy entered a recession. At
present, we can see that the 10-month MA is still below the
20-month MA and both are pointing lower, suggesting that
labour markets are still strong.
LEI is a composite average of 10 leading indicators used to forecast future economic activity in the U.S. Notice in chart 2 that on each
occasion the indicator has peaked several months prior to a recession. Also observe that on each occasion, the 20-month MA cut below
the 30-month MA just prior to the onset of a recession. Currently, LEI is pointing at robust economic conditions. Also, both the MAs are
pointing upwards with shorter-term MA above longer-term MA. This suggests that economic conditions in the U.S. still remain firm.
Chart 3 depicts consumer confidence index. Prior to the onset of a recession during the previous three occasions, consumer confidence
declined markedly, with the 20-month MA crossing underneath the 30-month MA exactly at the same time the recession were declared.
At present, the 20-month MA is clearly above the 30-month MA, suggesting that economic conditions are still robust.
While the three key indicators shown above suggest that economic conditions remain strong, it must be noted that each of these
indicators are at an extreme, reminiscent of readings seen during the late stages of an economic expansion. This in turn warrants
caution going forward.

S&P 500 Index: Within a rising channel
A drawdown of 20%
from top and upward
sloping channel support
signals end of correction
S&P 500 index has been trading within a rising channel since the turn of the decade, signalling that
we continue to be in a primary bull market. During this entire bull market, the index has declined
more than 15% on two occasions, and on each of these occassions has bounced to print fresh
highs. At present, the index has approached the lower end of this rising channel. As long as it does
not break and sustain below the channel, the bull market remains intact.
Russell 2000: Within a rising channel
US Midcap index too is

near to completion of its
correction as per price
equality.
The correction in the U.S. midcaps has been more severe than those in largecap stocks. The Russell
2000 index, which is a proxy of midcap stocks in the U.S., has been in a strong uptrend since 2011.
The current decline over the past few weeks has seen the index shedding 255 points from the
peak, but falls of such magnitude are not rare in a bull market. As can be seen in the above chart,
notice that each time the index fell more than 25% in the past, it rebounded strongly in the months
ahead. Our stance is that as long as the index is trading above the rising trendline, the overall bull
market among midcap stocks remains intact.

Dow Jones hitting 4 Standard deviation on 250 SMA
Date Closing Z-score 15D chg
22-03-2001 9389.48 -4.34 7.85%
21-09-2001 8235.81 -5.02 13.46%
10/10/2008 8451.19 -4.13 10.34%
25-08-2015 15666.44 -4.05 6.85%
24-12-2018 21792.2 -4.16
Avg 10%
DJIA: We have witnessed a sharp dip in 2nd fortnight of December 2018. Although after a sharp fall from ~24400 to ~21700 in just
seven sessions, we have seen Index has recovered in following 2 sessions. As we can see on chart displayed above, that, historically,
whenever Dow has tumbled that sharp and Zscore reached -4 deviation, recovery of an average ~9% recovery in Index is seen.
Germany Index- DAX
Dax is likely to find

strong support at 10000
mark due to confluence
of supports.

Germany after forming double top fell below rising channel indicating first signs to end of the
uptrend which we have been seeing since 2009. However, as per Dow theory, price have still not
formed lower tops and lower bottoms to signal start of a bear market. Adding to this, previous
two corrections in index were close to 30% and this time if this correction is part of the bull market
than it should end near 10000 mark. Further the pattern target of double top and inverse ab=cd
pattern target is also close to 10000.
Thus confluence of supports near 10000 mark is indicating that DAX should hold 10000 and we
could see strong resumption of uptrend in this year.

China - Shanghai equity Index
China consolidation
since financial crisis is
likely to continue with
price most likely to head
higher in 2019.
Source: Bloomberg
The above weekly chart of shanghai is telling us that index has actually not performed since 2008.
The price has been trading within the peak and trough of 2007-08. Currently price is 7% away from
its previous trough. Looking at the price structure we expect consolidation to continues in which
price should bounce from current level. If this happens to be true, we could see china equity to
remain in an uptrend for this year.
World Market Capitalization Showing Signs of a reversal
World market
capitalization has
completed its maximum
drawdown percentage,
indicating reversal.
Looking at the world market capitalization we observe that the current world market cap is near
to its channel support. Since the 2008 financial crisis the world market cap is moving in an upward
sloping channel. A max drawdown of 23% from its highs was reached in 2016 post which cyclical
stocks started performing. A similar drawdown is seen currently with a signs of reversal, also
supportive is an RSI divergence.

Commodities
S&P 500 and Bullion ratio chart
Commodities likely to
outperform equity for
next few months.
The above chart shows the ratio chart of S&P 500 index to Philadelphia Gold & silver index. Notice
from the chart that the ratio has made a double top pattern and reversed lower. Moreover, the
ratio has also formed a bearish divergence pattern with the RSI. All these in turn suggest that
bullion could start to outperform equities in the weeks ahead.
Gold – Bounced off the rising trend line support
Gold sideways
consolidation to remain
intact till $1120 is not
broken.
The above is the monthly chart of COMEX gold. The metal broke out of a falling wedge pattern in
2016, signalling an end to the 4-year downtrend. After the breakout from the pattern, the metal
has traded in a sideways range, but more importantly, it has not broken its intervening low of
around $1120. As long as this low holds, we expect gold to head higher in the coming months.

Gold short-term chart – Cycle analysis
Time cycle analysis

indicates higher gold
price in next few
months.
The above chart is the short-term chart of gold showing the cycle analysis. As per time-cycle
analysis, gold price is likely to advance for the next 20 weeks.
Gold silver ratio chart – At an important juncture
Gold/silver indicates
silver could outperform
gold.
The above is the ratio chart of gold to silver. Notice in the chart that since the past 2-decades the
ratio has been facing strong headwinds on every approach towards the 85-86 zone. Given that the
ratio is now at this zone, it indicates that silver is quite undervalued relative to gold. With silver
prices starting to show signs of strength, any signs of reversal in the ratio would suggest that silver
could start outperforming gold in the coming weeks. Alternatively, a break and stability above this
zone would indicate that silver’s underperformance will continue versus gold.

Silver- Breaks out of consolidation
Silver bottom is in place

as price breaks above
the upper end of the
range.
After consolidating within a narrow $1 range for nearly 5 months, silver prices have broken above
the upper end of the sideways range. The target of the range indicates a 7% upside for silver prices
In the short term. As far as medium term trend is concerned, silver price needs to sustain above
$17.50 for a change in the trend from down to up.
Silver CFTC position
Silver CFTC positions

signals for short squeeze
As per the latest CFTC data, silver managed money p Source: Bloomberg ositioning has flipped from
shorts to longs after several weeks, indicating that sentiment towards the metal is starting to swing
to bullish camp. With money managers turning bullish in the metal and with silver breaking out of
a 5-month consolidation zone, we expect short squeeze to unfold in the commodity in the weeks
ahead.

Silver seasonality
Silver bottom in
December as per
seasonality analysis for
past 25 years
The above chart is the seasonality chart of silver for the past 15 years. Notice above that
historically, silver prices have traded with a positive bias in each of the three months from January
to March, gaining the most in January (5.2%) and February (4.5%). If history is to go by, we can
expect a strong rally in silver prices in the days ahead, especially noting the recent breakout in
silver prices and change in sentiment from bearish to bullish.
WTI oil: Suggesting at short-term recovery
OIL price to recover with

trajectory to remain on
downside.
As per price equality, we expect WTI oil to rebound towards $54-55. The major key drivers for the
rally are:
 We expect 100% adherence to output cut from OPEC and Non OPEC
 Production cuts amounting to 1.2 mbpd from this month
 Likelihood of slowdown in US production due to pipeline constraints in the Permian basin and
low oil prices, which could lead to a slowdown in the US E&P activity in 2019
 As most of the negative factors have been discounted, oil could attract bargain hunting in case
risk global aversion abates
 Iranian sanction waivers will come to an end in early-May
 The Fed is likely to slow down the pace of rate hikes in 2019

WTI-Brent spread: Likely to revert towards $7
Pipeline constraints in
Permian basin and
Alberta is likely to
narrow WTI’s discount to
Brent
The recent production cuts announced by Canada have caused the spread between WTI and WCS
oil to shrink to $10 from a record $50. As Canadian oil is inferior to U.S. oil and as it costs around
$20/bbl to move oil by rail from Alberta to the U.S. Gulf Coast, we feel that at the current spread,
demand for Canadian oil from the U.S. is unlikely to sustain. On top of that, the U.S. Permian basin
continues to face an oil glut due to pipeline constraints. We feel that these issues coupled with
the fact that WTI oil has dipped towards $50 would cause U.S. supply glut to ease next year. This
in turn, we believe, would not only cause the spread between WTI and WCS to return back towards
$25 in the coming weeks, but would also cause the spread between WTI and Brent to narrow down
and revert towards the mean of around $7/bbl that has been prevalent for this decade.
Futures curve: Rising contango suggests at a weak structure
Oil has swung from

backwardation to
contango, indicating
markets are amply
supplied

For the first three quarters of 2018, the major theme in oil was that of supply tightness due to
looming Iranian sanctions. However, with the U.S. offering Iranian waivers and with global
production rising, there has been a marked change in the forward structure this quarter. As can
be seen above, the WTI market has swung from backwardation to contango, indicating concerns
of a supply glut. If the contango widens, it would pur further pressure on oil prices in the days
ahead.

LME metal index- Technical Outlook
A falling wedge pattern in

Bloomberg industrial
metal index is signalling
impending reversal from
support areas.
The above is the chart of metal index which tells us that the upmove which we had seen in the
metals are close to 61.8% retracement of its previous up move. Also, the fall from the top has been
in 5 legs in which leg 5 equality with leg 1 also coincides in the same support area where previous
supports are placed.
Looking at the current structure it also looks as if price is forming an ending diagonal pattern which
usually follows with an upsurge in prices. If this happens to be true, then we could see metal
commodities retracing higher in coming months.

Nifty Elliot-wave perspective
A falling wedge pattern

in Bloomberg industrial
metal index is signalling
impending reversal from
support areas.
NIFTY as per Elliot wave theory seems to be trading in the super cycle degree wave (III). This higher
degree wave, if impulse, started from the year 2009 and is currently having further upside.
Looking at the current wave cycle, Index is close to complete wave 4 of (III). The wave 4 , whichever
form of correction it takes, either Flat or a triangle it should not breach previous lows of 10000.
Post completion of the corection Index should begins it upmove.
The minimum target of the cycle is 12100, which is where the wave equality within the Grand
Super cycle degree will be reached.

Nifty up-swing Analysis
Median Rallies No of Median No of days
Years
Above 10% Rallies Taken
2007 56% 2 95.5
2008 46% 2 33
Nifty has seen smaller up
moves in 2018. 2009 42% 3 65
2010 30% 3 54
2011 17% 4 26
2012 43% 2 109
2013 28% 2 57
2014 76% 1 241
2015 17% 2 42.5
2016 42% 1 139
2017 73% 1 295
2018 17% 2 66
Average Move 40% 101.9
The above table represents the median returns of rallies above 10% nifty has given in a year. The
total average return of Nifty rally witnessed in a year without giving a 10% above correction is
40%. It’s interesting to see if a year has a smaller median return (indicating Nifty has not given
huge rallies in the year) the following year tends to see huge returns this could indicate that a
bigger rallies can be seen in the next year.
Nifty Down-Swing Analysis

Median Corrections No of Median No of days
Years
above 10% Corrections Taken
2007 -19% 2 24
2008 -43% 2 52
2009 -23% 2 29
Average yearly
Correction in Nifty over 2010 -16% 2 47.5
the years is -18% 2011 -14% 2 18.5
2012 -13% 1 22
2013 -21% 2 71.5
2014 -14% 1 40
2015 -13% 2 50
2016 -15% 2 63
2017 -
2018 -12% 2 36
Average Move -18% 41.2

No of % of Average
Stock Return Classification
stocks Total stocks Return
10 times Above 7 0.2% 2541.9%
5 times to 10 Times 9 0.3% 666.1%
Return-wise NSE stock 100% to 5 times 75 2.7% 203.7%
classification for CY 2018 Above 80% Less than 100% 21 0.7% 89.1%
Above 50% Less than 80% 68 2.4% 61.5%
Above 20% Less than 50% 177 6.3% 33.1%
Positive Stocks 622 22.2% 85.6%
Negative Stocks 2163 77.2% -37.3%
Total Active stocks 2801 100.0% -9.8%
Stock Returns in 2018

2018 was a negative year for 77% of the equity stocks posting an average negative return of -37%,
but the 22% stocks which were positive had posted an average return of 85%. Out of the total
stocks 91 stocks have given a return of above 100%.

Sector-Wise Median P/E Ratio (TTM) Historically with 4 quarter average
IT (Defensive) Pharma (Defensive)
50
25
40
20
30
15
20
10
5 10
0 0
Q2FY13
Q4FY13
Q2FY14
Q4FY14
Q2FY15
Q4FY15
Q2FY16
Q4FY16
Q2FY17
Q4FY17
Q2FY18
Q4FY18
Q2FY19
Q2FY13
Q4FY13
Q2FY14
Q4FY14
Q2FY15
Q4FY15
Q2FY16
Q4FY16
Q2FY17
Q4FY17
Q2FY18
Q4FY18
Q2FY19
FMCG (Defensive) Media
40
60
30
50
20
40
10
30
-
20
Q2FY13
Q4FY13
Q2FY14
Q4FY14
Q2FY15
Q4FY15
Q2FY16
Q4FY16
Q2FY17
Q4FY17
Q2FY18
Q4FY18
Q2FY19
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
TTM
25 Metals (Cyclical) 40
Realty (Cyclical)
20
30
15
20
10
5 10
0 0
Q2FY13
Q4FY13
Q2FY14
Q4FY14
Q2FY15
Q4FY15
Q2FY16
Q4FY16
Q2FY17
Q4FY17
Q2FY18
Q4FY18
Q2FY19
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
TTM
Infra (Cyclical) Energy (Cyclical)
30 15
25
20 10
15
10 5
5
0
0
Q2FY13
Q4FY13
Q2FY14
Q4FY14
Q2FY15
Q4FY15
Q2FY16
Q4FY16
Q2FY17
Q4FY17
Q2FY18
Q4FY18
Q2FY19
Q2FY13
Q4FY13
Q2FY14
Q4FY14
Q2FY15
Q4FY15
Q2FY16
Q4FY16
Q2FY17
Q4FY17
Q2FY18
Q4FY18
Q2FY19
Source: Bloomberg, Edelweiss Professional Investor Research

The above charts show us the sector wise median P/E ratio of its members. What we can clearly observe is that most of the defensives
are at the upper end of their valuation range while most cyclicals are near to their bottom of their 5 year valuation range. While metals
continue to correct, Real Estate is seeing PE expansion at the bottom of its cycle as it crosses over the 4 quarter average.

Sector Map - Comparing Performance
Sector Performance Over the Years

Rank 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
TELECOM UTILITIES METALS HEALTHCARE METALS REALTY

1 FMCG -21% AUTO 38% FMCG 2% BANKS 57% IT 55% BANKS 65% IT 25%
56% 153% 234% 15% 37% 106%
MATERIALS METALS HEALTHCARE HEALTHCARE HEALTHCARE HEALTHCARE INDUSTRIALS CONS.Disc MATERIALS MATERIALS
2 AUTO 204% REALTY 53% FMCG 11%
53% 121% -35% 34% -14% 21% 55% 8% 32% 56%
INDUSTRIALS ENERGY TELECOM - MATERIALS TELECOM - TELECOM CONS.Disc ENERGY CONS.Disc

3 BANKS 33% FMCG 46% IT 4% BANKS 5%
49% 118% 49% 166% 16% 18% 54% 16% 54%
ENERGY INDUSTRIALS TELECOM UTILITIES TELECOM

4 NIFTY -52% IT 134% FMCG 28% IT -18% AUTO 40% FMCG 10% AUTO 52% NIFTY 3%
45% 92% 3% 10% 49%
TELECOM INDUSTRIALS CONS.Disc HEALTHCARE METALS

5 NIFTY 40% BANKS -52% IT 26% AUTO -20% AUTO 7% FMCG 2% AUTO 9% ENERGY 0%
82% 123% 40% 48% 48%
MATERIALS CONS.Disc CONS.Disc - HEALTHCARE ENERGY

6 IT 40% IT -53% NIFTY 18% NIFTY 7% BSE500 37% ENERGY 1% BANKS 7% BSE500 -3%
72% 107% 23% 37% 40%
ENERGY - INDUSTRIALS CONS.Disc HEALTHCARE

7 BANKS 39% BSE500 63% BSE500 90% BSE500 16% NIFTY -25% BSE500 3% NIFTY 31% AUTO -1% BANKS 39%
56% 37% 5% -6%
METALS UTILITIES - CONS.Disc BSE500 - MATERIALS INDUSTRIALS UTILITIES -

8 BANKS 61% BANKS 84% BSE500 31% ENERGY 2% BSE500 -1% BSE500 4%
39% 56% 12% 27% 28% 38% 15%
HEALTHCARE INDUSTRIALS ENERGY - CONS.Disc - UTILITIES UTILITIES - CONS.Disc -

9 BSE500 39% NIFTY 55% AUTO -57% NIFTY 28% FMCG 3% BSE500 36%
76% 12% 31% 3% 20% 4% 16%
CONS.Disc CONS.Disc MATERIALS MATERIALS INDUSTRIALS INDUSTRIALS

10 BSE500 -58% NIFTY 76% BANKS -32% FMCG 19% NIFTY -4% NIFTY 3% AUTO 32%
37% 39% 10% 27% -4% -19%
CONS.Disc - ENERGY TELECOM UTILITIES - METALS INDUSTRIALS INDUSTRIALS MATERIALS

11 AUTO 30% FMCG 25% BANKS -9% IT 18% FMCG 32%
66% 74% 2% 34% 19% -6% 1% -19%
UTILITIES HEALTHCARE INDUSTRIALS UTILITIES MATERIALS ENERGY METALS - ENERGY UTILITIES METALS -
12 METALS 1% BANKS -10% REALTY -6%
20% 17% -69% 71% -39% 16% 10% 13% 30% 21%
HEALTHCARE MATERIALS - INDUSTRIALS UTILITIES MATERIALS TELECOM REALTY -

13 AUTO 3% REALTY 70% ENERGY 1% IT -8% NIFTY 29% AUTO -22%
19% 70% -45% 10% -10% 9% 14%
METALS - UTILITIES - METALS - UTILITIES - MATERIALS HEALTHCARE REALTY -

14 FMCG 13% IT -10% FMCG 47% IT 1% REALTY 8% IT 11%
74% 6% 47% 14% -14% -13% 31%
TELECOM - REALTY - REALTY - TELECOM - REALTY - METALS - TELECOM - HEALTHCARE TELECOM -

15 REALTY -82% METALS 8%
7% 26% 52% 3% 32% 31% 21% 0% 41%
CYCLICALS
DEFENSIVES
SENSITIVE
The above chart shows us the sector rankings as per the years and their returns. It is important to notice that the sectors move in
tandem with their respective super groups, classified as Cyclicals, Defensives and Sensitives. We can also notice that when cyclicals
lead defensives and sensitives take a back seat. Globally cyclicals have had been affected in the last year due to correction in commodity
prices, but it is evident that most of the bull rallies have cyclicals outperforming.

Cyclical Equal Weighted Chart
Indian Cyclical stock

index is showing a
divergence.
The above chart is the equal weighted chart of the cyclical indices mainly metals, materials,
industrials, real estate, infra & Energy. As we can observe that a divergence is visible on the chart
which sugggests that a bottom could be in place. According to the defensives chart below, we can
observe that defensives took the lead the previous year and have now retested the previous
breakout level. IT and FMCG have given good returns in the previous year. Pharma was the laggard
and could take lead in the year ahead. Cyclical could come back in the second half of the year if a
weakness in the dollar index plays out.
Defensives Equal Weighted Chart
Defensives are near a

retest after putting a
good show in 2018

Equal Weighted Pharma Index
Equal Weighted Pharma

Index is currently forming
an inverse H&S pattern.
The equal weighted Pharma Index is currently forming an inverse H&S pattern in its on going
consolidation. It is essesntial to note that it is for the first time in the consolidation the index has
formed a higher top higher bottom formation. This formation can indicate a resumption in the
uptrend for the index. Since Pharma was the underperforming defensive sector in 2018, 2019
could see it lead the defensive pack.
NSE Real Estate Index
Real estate moved out of

its channel consolidation.
The NSE real estate index has given a consolidation breakout. The PE ratio of the index has reached
its 10 year low. Realty has been underperfoming for last decade and a half, but the index had
picked outperformance in 2017 where it broke its previous highs of 2013. Moving above 300 could
confirm a higher high and higher low formation. This sector could hence yeild handsome returns
in 2019.

Paints
Equal Weighted Paints

chart is trading near to its
all time high.
NSE Infra Index
NSE Infra index has broken

out of its channel
consolidation
The Infra index has broken out of its consoidating channel, additionally a divergence is witnessed
on the RSI, an immediate 20% upmove can be witnessed towards its previous resistance of 3950.
The level of 4000 is an important resistance of the 10 year consolidation phase.

Berger Paints – Buy
Buy for a Target of 400
Stock is trading in a long term upward sloping channel. Currently the stock has completed its max
drawdown of 25% and is set to resume its uptrend. MACD is still riding in the bullish zone, recently
give a crossover indicates that a resumption in uptrend is possible and an immediate target of 400.
Concor – Buy
Buy for a target of 820
The stock is forming a cup and handle pattern on the weekly time frame. Broken out of the handle
formation the stock is set to resume its uptrend. MACD has also indicated a bullish tone as it has
broken above the zero treshold.

Axis Bank – Buy
Buy for a target of 780
Stock is near a 4 year consolidation breakout. MACD indicates a strong bullish momentum with a
crossover of the MACD line above the signal line. Axisbank has been one of the outperformers in
the banking pack for the last 6 months. We had initiated Axisbank in the last edition of chart
watchers, we still feel the stock can give handsome returns in 2019. An immediate target of 780 is
indicated according to the current formation.
Apollo Tyre - sell
Sell for a target of 195
The stock is moving in an upward sloping channel since 2014, currently stock has given a bearish
flag breakdown. A high possibility for the stock to reach in the vicinity of 195 initially.

Edelweiss Broking Limited,1st Floor, Tower 3, WingB, Kohinoor City Mall,Kohinoor City,Kirol Road, Kurla(W)
Board:(91-22)42722200
VINAY
Vinay Khattar Digitally signed by VINAY KHATTAR
DN: c=IN, o=Personal, postalCode=400072,
st=Maharashtra,
2.5.4.20=87db74ffb17a70c89e8519a4d13e40
Head Research e93c4bcaba1a64d00f3c841d2fee3fa678,
KHATTAR
serialNumber=cd5737057831c416d2a5f7064
cb693183887e7ff342c50bd877e00c00e2e82a
1, cn=VINAY KHATTAR
vinay.khattar@edelweissfin.com Date: 2019.01.18 17:03:25 +05'30'

Disclaimer
Edelweiss Broking Limited (“EBL” or “Research Entity”) is regulated by the Securities and Exchange Board of India (“SEBI”) and is licensed to carry on the business of broking, depository services
and related activities. The business of EBL and its Associates (list available on www.edelweissfin.com) are organized around five broad business groups – Credit including Housing and SME
Finance, Commodities, Financial Markets, Asset Management and Life Insurance.
Broking services offered by Edelweiss Broking Limited under SEBI Registration No.: INZ000005231; Name of the Compliance Officer: Mr. Brijmohan Bohra, Email ID:
complianceofficer.ebl@edelweissfin.com Corporate Office: Edelweiss House, Off CST Road, Kalina, Mumbai - 400098; Tel. 18001023335/022-42722200/022-40094279
This Report has been prepared by Edelweiss Broking Limited in the capacity of a Research Analyst having SEBI Registration No. INH000000172 and distributed as per SEBI (Research Analysts)
Regulations 2014. This report does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information
contained herein is from publicly available data or other sources believed to be reliable. This report is provided for assistance only and is not intended to be and must not alone be taken as the
basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it deems necessary to
arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including t he merits and risks involved), and should consult his own advisors
to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors.
This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in
any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen
or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availa bility or use would be contrary to law, regulation or which would subject
EBL and associates / group companies to any registration or licensing requirements within such jurisdiction. The distribution of this report in certain jurisdictions may be restricted by law, and
persons in whose possession this report comes, should observe, any such restrictions. The information given in this report is as of the date of this report and there can be no assurance that
future results or events will be consistent with this information. This information is subject to change without any prior notice. EBL reserves the right to make modifications and alterations to
this statement as may be required from time to time. EBL or any of its associates / group companies shall not be in any way responsible for any loss or damage that may arise to any person from
any inadvertent error in the information contained in this report. EBL is committed to providing independent and transparent recommendation to its clients. Neither EBL nor any of its associates,
group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including loss of revenue or lost profits that
may arise from or in connection with the use of the information. Our proprietary trading and investment businesses may make i nvestment decisions that are inconsistent with the
recommendations expressed herein. Past performance is not necessarily a guide to future performance .The disclosures of interest statements incorporated in this report are provided solely to
enhance the transparency and should not be treated as endorsement of the views expressed in the report. The information provided in these reports remains, unless otherwise stated, the
copyright of EBL. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright of EBL and may not be used in any form or for any purpose
whatsoever by any party without the express written permission of the copyright holders.
EBL shall not be liable for any delay or any other interruption which may occur in presenting the data due to any reason including network (Internet) reasons or snags in the system, break down
of the system or any other equipment, server breakdown, maintenance shutdown, breakdown of communication services or inability of the EBL to present the data. In no event shall EBL be
liable for any damages, including without limitation direct or indirect, special, incidental, or consequential damages, losses or expenses arising in connection with the data presented by the EBL
through this report.
We offer our research services to clients as well as our prospects. Though this report is disseminated to all the customers simultaneously, not all customers may receive this report at the same
time. We will not treat recipients as customers by virtue of their receiving this report.
EBL and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities
thereof, of company(ies), mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the
financial instruments of the subject company/company(ies) discussed herein or act as advisor or lender/borrower to such company(ies) or have other potential/material conflict of interest with
respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. EBL may have proprietary long/short
position in the above mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and do not consider risk appetite or investment
objective of any particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with
EBL.
EBL or its associates may have received compensation from the subject company in the past 12 months. EBL or its associates may have managed or co-managed public offering of securities for
the subject company in the past 12 months. EBL or its associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company
in the past 12 months. EBL or its associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the
subject company in the past 12 months. EBL or its associates have not received any compensation or other benefits from the Subject Company or third party in connection with the research
report. Research analyst or his/her relative or EBL’s associates may have financial interest in the subject company. EBL, its associates, research analyst and his/her relative may have other
potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance.
Participants in foreign exchange transactions may incur risks arising from several factors, including the following: ( i) exchange rates can be volatile and are subject to large fluctuations; ( ii) the
value of currencies may be affected by numerous market factors, including world and national economic, political and regulatory events, events in equity and debt markets and changes in
interest rates; and (iii) currencies may be subject to devaluation or government imposed exchange controls which could affect the value of the currency. Investors in securities such as ADRs and
Currency Derivatives, whose values are affected by the currency of an underlying security, effectively assume currency risk.
Research analyst has served as an officer, director or employee of subject Company: No

EBL has financial interest in the subject companies: No
EBL’s Associates may have actual / beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research
report.
Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the e nd of the month immediately preceding the date of publication of
research report: No
EBL has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No
Subject company may have been client during twelve months preceding the date of distribution of the research report.
There were no instances of non-compliance by EBL on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years.

Disclaimer
A graph of daily closing prices of the securities is also available at www.nseindia.com

Analyst Certification:
The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities,
and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
Additional Disclaimer for U.S. Persons
Edelweiss is not a registered broker – dealer under the U.S. Securities Exchange Act of 1934, as amended (the“1934 act”) and under applicable state laws in the United States. In addition
Edelweiss is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable
state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investme nt services provided by Edelweiss, including the products and
services described herein are not available to or intended for U.S. persons.
This report does not constitute an offer or invitation to purchase or subscribe for any securities or solicitation of any investments or investment services and/or shall not be considered as an
advertisement tool. "U.S. Persons" are generally defined as a natural person, residing in the United States or any entity organized or incorporated under the laws of the United States. US Citizens
living abroad may also be deemed "US Persons" under certain rules.
Transactions in securities discussed in this research report should be effected through Edelweiss Financial Services Inc.
Additional Disclaimer for U.K. Persons
The contents of this research report have not been approved by an authorised person within the meaning of the Financial Services and Markets Act 2000 ("FSMA").
In the United Kingdom, this research report is being distributed only to and is directed only at (a) persons who have professional experience in matters relating to investments falling within
Article 19(5) of the FSMA (Financial Promotion) Order 2005 (the “Order”); (b) persons falling within Article 49(2)(a) to (d) of the Order (including high net worth companies and unincorporated
associations); and (c) any other persons to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”).
This research report must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this research report relates is available only to
relevant persons and will be engaged in only with relevant persons. Any person who is not a relevant person should not act or rely on this research report or any of its contents. This research
report must not be distributed, published, reproduced or disclosed (in whole or in part) by recipients to any other person.
Additional Disclaimer for Canadian Persons
Edelweiss is not a registered adviser or dealer under applicable Canadian securities laws nor has it obtained an exemption from the adviser and/or dealer registration requirements under such
law. Accordingly, any brokerage and investment services provided by Edelweiss, including the products and services described herein, are not available to or intended for Canadian persons.
This research report and its respective contents do not constitute an offer or invitation to purchase or subscribe for any securities or solicitation of any investments or investment services.
Disclosures under the provisions of SEBI (Research Analysts) Regulations 2014 (Regulations)
Edelweiss Broking Limited ("EBL" or "Research Entity") is regulated by the Securities and Exchange Board of India ("SEBI") and is licensed to carry on the business of broking, depository services
and related activities. The business of EBL and its associates are organized around five broad business groups – Credit including Housing and SME Finance, Commodities, Financial Markets, Asset
Management and Life Insurance. There were no instances of non-compliance by EBL on any matter related to the capital markets, resulting in significant and material disciplinary action during
the last three years. This research report has been prepared and distributed by Edelweiss Broking Limited ("Edelweiss") in the capacity of a Research Analyst as per Regulation 22(1) of SEBI
(Research Analysts) Regulations 2014 having SEBI Registration No.INH000000172.

Chartwatchers - Emerging Markets Huddle To Triumph Over Volatility

Uploaded by

Copyright:

Available Formats

You might also like

Chartwatchers - Emerging Markets Huddle To Triumph Over Volatility

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chartwatchers - Emerging Markets Huddle To Triumph Over Volatility

Uploaded by

Copyright:

Available Formats

Chart-Watchers Jan 2019

Emerging Markets Huddle to Triumph Over Volatility

Sagar Doshi Joaquim Fernandes Ankit Narshana

ChartWatchers – “Emerging Markets Huddle to Triumph Over Volatility”

 Ratio chart of equal weighted emerging market to equal weighted Developed

 Sectors which we like are Pharma, Paints, Infra & Realty

Date: 18th January, 2019

1 Edelweiss Professional Investor Research – Trading Desk

Valuation Perespective : PE Ratio of Emerging Markets V/S Developed Markets

Source: Edelweiss Professional Investor Research.

2 Edelweiss Professional Investor Research – Trading Desk

Bearish dollar to benefit

Source: Bloomberg, Edelweiss Professional Investor Research.

Dollar Index vs MSCI Emerging:

Dollar Index have inverse

Source: Bloomberg, Edelweiss Professional Investor Research.

3 Edelweiss Professional Investor Research – Trading Desk

Source: Bloomberg, Edelweiss Professional Investor Research.

Dollar denominated – Sensex to world Equities (Equal weighted)

Source: Bloomberg, Edelweiss Professional Investor Research.

4 Edelweiss Professional Investor Research – Trading Desk

Emerging market equal

Source: Bloomberg, Edelweiss Professional Investor Research.

2) MSCI Emerging Market Index and USD/CNY

Source: Bloomberg, Edelweiss Professional Investor Research.

5 Edelweiss Professional Investor Research – Trading Desk

1) U.S. employment report: 2) U.S. Leading Economic Index (LEI):

6 Edelweiss Professional Investor Research – Trading Desk

Source: Bloomberg, Edelweiss Professional Investor Research.

Russell 2000: Within a rising channel

US Midcap index too is

Source: Bloomberg, Edelweiss Professional Investor Research.

7 Edelweiss Professional Investor Research – Trading Desk

Date Closing Z-score 15D chg

22-03-2001 9389.48 -4.34 7.85%

21-09-2001 8235.81 -5.02 13.46%

10/10/2008 8451.19 -4.13 10.34%

25-08-2015 15666.44 -4.05 6.85%

24-12-2018 21792.2 -4.16

Source: Bloomberg, Edelweiss Professional Investor Research.

Germany Index- DAX

Dax is likely to find

Source: Bloomberg, Edelweiss Professional Investor Research.

8 Edelweiss Professional Investor Research – Trading Desk

World Market Capitalization Showing Signs of a reversal

Source: Bloomberg, Edelweiss Professional Investor Research.

9 Edelweiss Professional Investor Research – Trading Desk

Source: Bloomberg, Edelweiss Professional Investor Research.

Gold – Bounced off the rising trend line support

Source: Bloomberg, Edelweiss Professional Investor Research.

10 Edelweiss Professional Investor Research – Trading Desk

Time cycle analysis

Source: Bloomberg, Edelweiss Professional Investor Research.

Gold silver ratio chart – At an important juncture

Source: Bloomberg, Edelweiss Professional Investor Research.

11 Edelweiss Professional Investor Research – Trading Desk

Silver bottom is in place

Source: Bloomberg, Edelweiss Professional Investor Research.