Indian Summer Brings Heat Back to Nifty Fifty

LONDON, August 1, 2012 /PRNewswire/ --

• Indian stocks finally rebound on central bank anticipation
• Video of Colin Cieszynski's Nifty Fifty analysis here
  

India's Nifty Fifty Index fell through the back half of 2011 and the first part of this year. In recent months, however, it has finally started to trend higher, maintaining its recovery course despite a normal trading correction in July.

Seasonal and interest rate trends suggest that the index could start to attract even more attention in the coming month.  Following these recent changes, Colin Cieszynski (Senior Market Analyst at CMC Markets) has compiled a special report into India's Nifty Fifty.

Colin's report looks at three key areas to provide an analysis into what the future holds for the Nifty Fifty: positive seasonal trends that have emerged, the sector weighting that is unique to India's stock market and finally, its recent recovery trend.

The Reserve Bank of India's interest rate was left unchanged for the second time since June today in an effort to temper inflationary impulses. After two years of tightening, the RBI had previously cut interest rates in April this year. It had been expected to announce another 25 basis point interest rate cut in June but held off as did many other central banks around the world pending the Greek election and EU summit. The economic growth outlook for the fiscal year has also been revised down to 6.5% from the initial 7.3% assumed in April.

1. Positive seasonal trends emerging

Seasonal trends in India are quite different from other stock markets around the world. The three weakest months of the year for trading in the Nifty have traditionally been March (start of summer), June (end of summer) and October (end of monsoon) which obviously coincide with the changing of seasons.

The strongest period of the year is the winter, running from November to February, which coincides with 'wedding season' in India.  Interestingly, seasonal trading in India is most similar to gold which is also influenced by Indian seasons due to high consumer demand for precious metals.

The first three months of monsoon season have also generally been positive for the Nifty. This year, the index has been trending higher since late May and kicked off July with a breakout from a long-term downtrend suggesting that after a year of slowdown fears in emerging markets dragging on the Index, normal seasonal trends may be re-asserting themselves.  

         Average Monthly Return 1987-present
      Month        Dow         India       Gold
     January      0.37%        1.01%      0.12%
    February      0.38%        5.53%      0.28%
      March       1.13%       (0.48%)    (0.15%)
      April       2.39%        0.47%      1.04%
       May        1.16%        4.62%      0.11%
      June       (0.64%)      (1.05%)    (0.06%)
      July        1.70%        2.24%      0.09%
     August      (1.02%)       2.98%      0.68%
    September    (0.97%)       2.10%      1.72%
     October      0.52%       (2.41%)    (0.01%)
    November      1.29%        1.14%      2.15%
    December      2.02%        3.62%      0.69%

Source: CMC Markets

2. Sector Weighting

Relative to other major indices around the world, India's Nifty Fifty tends to be more heavily weighted in the energy, information technology and financial sectors. In comparison with other Asian economies, the technology sector is more focused on IT services than semi-conductors or software. The index could benefit from a rebound in energy prices, and improved sentiment toward banks and the more steady IT service sector not being impacted by the economic slowdown in the same way that chipmakers could be.

                     Market Cap Weighting By Country May 2012
                         US  Asia  India China Australia Europe Latin Am World
           Total        100% 100%  100%  100%    100%     100%    99%    100%
          Energy        11%   8%    13%   8%      7%      12%     11%     11%
         Materials       3%   6%    8%    13%     23%     10%     19%     7%
        Industrials     10%   5%    7%    17%     7%      10%      5%     10%
         Consumer
       Discretionary    11%   9%    9%    9%      3%       9%      5%     10%
     Consumer Staples   11%   2%    11%   8%      8%      15%     18%     11%
        Health Care     12%   0%    4%    5%      4%      12%      0%     10%
        Financials      15%   30%   27%   33%     40%     18%     20%     19%
        Information
        Technology      20%   28%   13%   3%      1%       3%      0%     13%
     Telecom Services    3%   8%    2%    1%      5%       6%     16%     5%
         Utilities       4%   4%    4%    3%      2%       5%      6%     4%

Source: CMC Markets

3. Recent recovery trend and the RBI rate decision

Through the first half of this year, export sensitive emerging economies such as China, India and Brazil have been losing steam with key customers in Europe, and to a lesser extent the US. Recognizing the need to stimulate internal demand, central banks in China and Brazil have already lowered interest rates this month.

It is clear from the RBI governor's quotes today that the risk of higher inflation was key to the RBI decision, with Governor Duvvuri Subbarao stating that lowering interest rates would only 'aggravate' inflationary 'impulses'.

An additional video is available here, looking at the market outlook for the US during August.  Traditionally August has been one of the weaker months of the year for stock markets.  Between central bank meetings and political developments, this August could be potentially quite active.

The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.