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Early Warning & Signals Through ChartsNETRA September 2021
Gold forms bullish price patterns across time frames
A hammer is a bullish candlestick pattern. Prices, figuratively speaking, fall & hammer out a bottom.
As the price pattern suggests, a breakout above $1850 can set Gold prices on course for a new life time high above $2100.
This can have bullish implications for Gold & Gold mining shares alike.
Source: Bloomberg. Data as on 30 Aug 2021
Ind
ex V
alu
e
Gold has formed two Hammer Patterns - One each on
monthly & weekly charts
Bullish Hammer
Breakout at $1860
0.1
0.2
0.4
0.8
1.6
3.2
FTSE Gold Mine Index to NASDAQ Composite Index Ratio
Gold mining shares are cheapest, relative to technology stocks
Gold mining shares have underperformed technology shares since 2011. That was the precise year when Gold’s 12-year structural bull market ended.
Now Gold mining shares are at their cheapest level relative to tech.
A up-move in Gold prices can set a very positive undertone for Gold mining shares.
Source: Bloomberg, Data as on Aug 30th 2021
Structural Gold bull market
Gold mining shares at their cheapest relative to technology led NASDAQ composite
Dec-0815%
Jun-1118.5%
Oct-1425.5%
Aug-1917.6%
Jun-2136.8%
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1400
MSCI Emerging Market Index LHS Federal Reserve Balance Sheet (as a % of GDP) RHS
Fed’s stimulus taper attempt!
US Fed has been on an unprecedented spree of easy liquidity for the last 18 months.
On August 27th 2021, the US Fed Chairman indicated his desire to bring the 4th attempt & reduce the amount of stimulus. Although this isn’t reduction in the balance sheet, it can reduce incremental liquidity.
Money printing can become tighter & emerging markets may get hit as liquidity declines.
Source: Bloomberg, Aug 30th , 2021
US Federal Reserve has attempted 3 tapers of its balance sheet (total assets) earlier. Each time, emerging markets have been hit hard.
1st Taper
2nd Taper 3rd Taper
4th TaperEM index
-27%EM index
-31%
-60.0
-50.0
-40.0
-30.0
-20.0
-10.0
0.0
Au
g-0
0
Au
g-0
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Au
g-0
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Au
g-0
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Au
g-0
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Au
g-0
5
Au
g-0
6
Au
g-0
7
Au
g-0
8
Au
g-0
9
Au
g-1
0
Au
g-1
1
Au
g-1
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Au
g-1
3
Au
g-1
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Au
g-1
5
Au
g-1
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Au
g-1
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Au
g-1
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Au
g-1
9
Au
g-2
0
Au
g-2
1
Drawdown (%) (NIFTY)
Nifty index juggernaut continues without a 10% drawdown
Nifty Index bottomed in the last week of March 2020. Since then, the index has more than doubled and has seen some volatility.
But it has seen no drawdown in excess of 10% from its lifetime highs since the bottom.
This is a rare occurrence. The only times this type of price action was witnessed were in 2014 & 2017. Both years were then followed by sharp corrections of 20% & 15% respectively.
Prepare.
Source: Bloomberg, Data as on 30 Aug 21
Quiet times are followed by volatile times.
Nifty % fall from peak
A return to higher profitability will be a big positive for equity shareholders as deleveraging
raises prospects of stronger earnings
Companies improve their financial health at a rapid pace
The net debt-to-EBITDA ratio is a debt ratio that shows how many years it would take for a company to pay back its debt if net debt and EBITDA are held constant.
The net debt-to-EBITDA has come down even as the ROCE remains at historical lows. As profitability improves, this ratio should probably look even better. The industry will have to think of ways to either distribute cash flows or invest heavily.
Source: Bloomberg; Data as on Aug 30th 2021
Data for BSE 200 Index
12.813.0
5.01.4
2.0
3.1
2.7
3.2
2.2
Jun
-03
Feb
-04
Oct
-04
Jul-
05
Mar
-06
No
v-0
6
Au
g-0
7
Ap
r-0
8
Dec
-08
Sep
-09
May
-10
Feb
-11
Oct
-11
Jun
-12
Mar
-13
No
v-1
3
Au
g-1
4
Ap
r-1
5
Dec
-15
Sep
-16
May
-17
Jan
-18
Oct
-18
Jun
-19
Mar
-20
No
v-2
0
Jul-
21
Return on Capital (%, 3MMA) Net Debt/EBITDA (3MMA)
Long term banking loan growth remains better
Short term credit has been a key area of concern, hit hard by decline in working capital loans.
The declining growth rates & then COVID related disruption has impacted demand for short term loans.
A revival in growth is likely to boost demand for credit. Steady long term loans growth rate reflects that the slowdown is part of the business cycle.
Source: CMIE as on Aug 2021
Growth in long term loans remains stronger
21
77 7
17
12
15
10
0
5
10
15
20
25
FY11-15 FY16-20
%
Short Term Loans Medium Term Loans
Long Term Loans Non-food credit growth
-0.2
0.3
0.8
1.3
1.8
2.3
2.8
3.3
3.8
4.3
% s
pre
ad
India 5Yr AAA Corp Bond - India 5 Yr Govt Bond Yield India 5Yr AAA Corp Bond- Repo rate
Corporate borrowing costs have room for further fall?
A credit crisis causes a sharp widening in credit spreads. India 5Yr AAA corporate bond spreads have widened during such crisis.
As liquidity returns & crisis eases, the credit spreads revert to normal levels. This usually coincides with RBI cutting repo rates.
The cycle is complete when corporate bond yield spread over repo rate also reverses to average.
The last step in the current cycle is still pending.
Source: CMIE as on Aug 2021
Credit crisis causes credit spreads to expand. Spreads ease, and later the term spread narrows at
the fag end of the rate cycle.Credit spreads ease, Term spreads next?
68 66
5247
51
65
54
66 68 68
47
107111
18 15 13 12 11 13 12 13 14 139
1421
17 15 12 10 9 10 9 9 10 8 6 8 70
20
40
60
80
100
120
FY 10
FY 11
FY 12
FY 13
FY 14
FY 15
FY 16
FY 17
FY 18
FY 19
FY 20
FY 21
FY 22
%
Largecap/ GVA Midcap/ GVA Smallcap/ GVA
Smallcaps are Smaller in Capitalization
The stellar rally in the last 18 months and the large hit to the economy is clearly visible in Market Capitalization to Gross Value added.
As the economy opens & markets digests the incoming volatility, there is likely to be a convergence between economic growth rising and market cap consolidating.
As local economy improves, smaller companies are likely to do better and their market cap is likely to rise at a faster pace than large caps. A convergence ahead!
Source: Bloomberg; Data as on 31 Aug 2021
GVA = GDP – Taxes + SubsidyIndia’s listed universe market cap is now at a decade high with majority of increase coming for large cap
19.3%
-70.8%377.4%
-143.5% 30.1% 32.5% 39.2%
8,982
3,685
-1,648-3,851
21,702 22,166
16,940
FY17 FY18 FY19 FY20 FY21 FY22E FY23E
% contribution of Incremental Profits FromBanks + Metals&Mining
Rest
Just two sectors are doing the heavy lifting for profits
Banks + Metals & Mining companies have been the biggest contributors to incremental profits over the last few years.
The cleanup in banking & return to normalcy is likely to improve profitability for banks further.
This is likely to provide further boost to the BFSI segment as metals & mining are discounting the best-case scenario while banks aren’t.
Source: Bloomberg; Data as on Aug 2021
Total PAT (INR Billion)
Contribution %
1
1.5
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2.5
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3.5
4
800
1800
2800
3800
4800
5800
NSEMET Index (LHS) Copper to US Long Bonds Ratio (RHS)
Dr. Copper’s underperformance puts metals rally at risk?
When copper prices accelerate more than bond prices, it usually indicates that markets are discounting stronger growth ahead. This has been the case since the bottom in metal prices since 2020.
Recently, Copper prices began to slide lower & have begun to underperform bond prices.
Historically this is a red flag for metal prices & can lead to a deep correction in NSE Metals Index.
Source: Bloomberg; Data as on Aug 2021
Historically Copper’s outperformance to bonds bodes well for metal companies
Divergence in Copper to Bond ratio and NSE Metals Index can
put the rally in jeopardy
0%
20%
40%
60%
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120%
Auto scrap Waste Electrical andElectronic Equipment
Municipal solid waste Construction waste
China Leading countryLikely China Catchup
China recycling: Emerging threat to metal demand
A large reservoir of scrap metal developing from China’s strong metal demand period in 2000-08 can have a bearing on the metals market.
China's recycling efficiency may grow rapidly despite its four major waste types' current recycling levels lagging developed countries by 30-50% pts. Over the next decade this is likely to change as secondary metals' share of demand rises from ~20% to more than 37%.
Source: UBS; Data as on Aug 2021
Recycling efficiency gap across four major waste categories
>50% >50%
>30%>30%
We only see what we want to see…
Don’t see only those facts which confirm our belief while evaluating
investment decisions
Disclaimer
In this material DSP Investment Managers Pvt. Ltd. (the AMC) has used information that is publicly available, including informationdeveloped in-house. Information gathered and used in this material is believed to be from reliable sources. The AMC however does notwarrant the accuracy, reasonableness and / or completeness of any information. The above data/statistic are given only for illustrationpurpose. The recipient(s) before acting on any information herein should make his/their own investigation and seek appropriateprofessional advice. This is a generic update; it shall not constitute any offer to sell or solicitation of an offer to buy units of any of theSchemes of the DSP Mutual Fund. The data/statistics are given to explain general market trends in the securities market, it should not beconstrued as any research report/research recommendation. We have included statements / opinions / recommendations in thisdocument, which contain words, or phrases such as “will”, “expect”, “should”, “believe” and similar expressions or variations of suchexpressions that are “forward looking statements”. Actual results may differ materially from those suggested by the forward lookingstatements due to risk or uncertainties associated with our expectations with respect to, but not to, exposure to market risks, generaleconomic and political conditions in India and other countries globally, which have an impact on our services and / or investments, themonetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equityprices or other rates or prices etc.
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