1 Edelweiss Investment Research – Trading Desk
Edelweiss Investment Research
ChartWatchers – “Precious Metals Emerging as a Dark Horse”
Since start of the year we have had indicated that 2017 is the year for commodities and
emerging market. Emerging markets have outperformed developed markets by 14% and
metals have rallied 25% so far.
The world’s Major economies are on the road to recovery after years of relapse. The U.S
and emerging economies GDP, ‘standout’ among global economies. After an extensive
slouch, factory output around the world is ramping up.
Data suggests, every time PMI crosses above its 3 month moving average commodity
prices as well as commodity stocks have rallied approximately 70% of time in next three
months.
Precious metal prices have been underperforming Base metal prices since the start of
the commodity Bull Run. At current juncture precious metal to base metal ratio is at its
extreme tail and possible reversion to the mean could occur.
The current phase, which we are going through has the same characteristics of the
2000-2008 phase where there is uptick in U.S. interest rate and inflation. Base metals
have been outperforming other asset classes and precious metals would now join the
rally.
Silver ETF continues to see inflows whereas Gold ETF inflow surges after 3 years of
consistent outflow. The current gold ETF flow grew 20% YoY while silver ETFs have seen
consistent inflows.
Nifty stalled at 10150 in-lines with our expectation. The long term target of 11500
remains intact while 9700-9600 remains strong base for the short term. Thus,
corrections in Index will continue to remain buying opportunity.
The NSE 100 Materials Sector is a GICS (Global industry classification standard) Sector
index created giving equal weights to the prices of stocks that are classified under the
material sector. The Index is at its 9 year trend line support breaking out of a minor
consolidation. The index has stocks mainly from metals, cement and paint sectors.
Furthermore we individually break down the sectors and like them purely on charts.
Sectors which can outperform the broader market from current scenario are Cement,
Paints and Metals.
Focus stocks for trading
Long ideas – HINDZINC, DALMIA BHARAT & ASIAN PAINTS
Short ideas – GLENMARK PHARMA
Sagar Doshi Chief Manager (Research Analyst) 91 (22) 4088 5757 Ext.6226 [email protected] Joaquim Fernandes Research Analyst +91 (22) 4040 6130 [email protected] Ankit Narshana Research Analyst +91 (22) 4040 7596 [email protected]
Date: 1st
August , 2017
2 Edelweiss Investment Research – Trading Desk
A Global Recap of H1 2017
Source: Bloomberg.
Since the start of the year we have been indicating that 2017 is the year for commodities and emerging
market. Emerging market has outperformed developed market by 14% and metals have rallied 25% so far.
The U.S and emerging economies GDP, ‘standout’ among global economies.
Source:International Monetary Fund, World Economic Outlook Database, April 2017, GDP Figures are estimates except for India
The interest rates have
risen and commodities
have started to bottom
out, while markets trade at
52-week highs
The world’s Major
economies are on the road
to recovery after years of
relapse.
UNITED STATES Gathering momentum
2016 2017
+1.6 +2.3
Europe Gaining ground 2016 2017
+1.7 +1.7
JAPAN Seeking reflation 2016 2017
+1.0 +1.2
Emerging Markets On growth trajectory
2016 2017
+4.1 +4.5
China Signs of stabilization 2016 2017
+6.7 +6.6
India Demon effects to rub off 2016 2017
+8.0 +7.1
Emerging market has
outperformed developed
market by 14% and metals
have rallied 25% so far.
3 Edelweiss Investment Research – Trading Desk
Manufacturing activity contributing to global recovery
Source: Edelweiss Investment Research
The Purchasing Managers Index is an indicator of the economic health of the manufacturing sector. It gives
indication of whether business conditions for a number of variables in the manufacturing sector have
improved deteriorated or stayed the same compared to the previous reading. After an extensive slouch,
factory output around the world is ramping up.
Commodity Price V/S PMI
Source: Edelweiss Investment Research
We have backtested more than 10 years of data and seen a repetitive pattern when PMI cross above its 3
month moving average. Everytime there is a cross above, commodity prices as well as commodity stocks
have rallied approximately 70% of time in next three months. Currently, there is a PMI crossover which is
indicating continuing momentum for copper and energy prices.
44
46
48
50
52
54
56
58
Global PMI eurozone us canada japan germany france uk
31-07-2016 31-07-2017
Expansion
Contraction
30
35
40
45
50
55
60
No
v-0
6
Ap
r-0
7
Sep
-07
Feb
-08
Jul-
08
De
c-0
8
May
-09
Oct
-09
Mar
-10
Au
g-1
0
Jan
-11
Jun
-11
No
v-1
1
Ap
r-1
2
Sep
-12
Feb
-13
Jul-
13
De
c-1
3
May
-14
Oct
-14
Mar
-15
Au
g-1
5
Jan
-16
Jun
-16
No
v-1
6
Ap
r-1
7PMI 3 Month Avg
4%
6%
8%7%
S&P 500 Energy
S&P 500 Materials
WTI Crude
Copper
After an extensive slouch,
factory output around the
world is ramping up
Commodity prices tend to
rise three months after
PMI Cross-over.
4 Edelweiss Investment Research – Trading Desk
Precious Metals/Base Metals Ratio
Source: Edelweiss Investment Research
Precious metals prices have been underperforming Base metal prices since the start of the commodity bull
run. At current juncture precious metals to base metal ratio is at its extreme tail and possible reversion to the
mean could occur as Precious metals can start out performing base metals.
Source: Edelweiss Investment Research
Gold has historically proven as an inflationary hedge. During the period 2000–2008 rising interest rates and
inflation supported precious metals upmove. Base metals have a tendency to rally in the initial phase while
precious metals rally later. The phase of 2008-2011 saw gold surging and outperforming all asset classes due
to safe haven demand. Following its phase of outperformance, 2011-2016 saw gold underperforming and
correcting by almost 45% from high as inflation and interest rate inched lower. The current phase, which we
are going through has the same characteristics of the 2000-2008 phase where there’s uptick in U.S. interest
rate and inflation, base metals have been outperforming other asset classes and precious metals would
now join the rally.
0.1
0.15
0.2
0.25
0.3
20
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17
Precious Metals Base Metals US Equity
Rising U.S. Inflation and interest
rate
Rally as a inflationary hedge
Safe haven Demand
& abundant liquidity
U.S. Inflation and interest
rate moves lower
U.S. Inflation
and interest
rate pick up
Outperform ReboundUnderperform
History suggests 0.16 as a
strong support for PM/BM
ratio.
Gold is not only a safe
haven, but also an
inflationary hedge
5 Edelweiss Investment Research – Trading Desk
Fund Flows In Precious Metals
Source: Edelweiss Investment Research
Silver ETF continues to see inflows whereas Gold ETF inflow surges after 3 years of consistent outflow. The
current gold ETF flow grew 20% YoY while silver ETFs are at its all time highs.
Total CFTC position in precious metal.
Source: Edelweiss Investment Research
The Commodity Futures Trading Commission's (CFTC) weekly Commitments of Traders (COT) report is
considered an indicator for analyzing market sentiment and many speculative traders use the data to help
them decide whether or not to take a long or short position. The above Chart is an aggregate of the CFTC
positions of Gold, Silver, Platinum & Palladium. Short Covering and Long Build up are simultaneously
occurring at the current juncture, indicating a bullish sentiment. The current long positions are highest in
2017.
0
10000000
20000000
30000000
40000000
50000000
60000000
70000000
80000000
90000000
0
100000000
200000000
300000000
400000000
500000000
600000000
700000000
800000000
28-
04-
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28-
09-
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28-
02-
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31-
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31-
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30-
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28-
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31-
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20
17
Silver ETF Holdings GOLD ETF Holdings
0
100000
200000
300000
400000
500000
600000
700000
201
4
201
4
201
4
201
4
201
4
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7
201
7 CFTC Long Positions CFTC Short Positions
Silver ETF continues to see
inflows whereas Gold ETF
inflow surges after 3 years
of consistent outflow.
CFTC Long positions in all
precious metals including
Gold, silver, platinum and
palladium are at 52 week
high.
6 Edelweiss Investment Research – Trading Desk
GOLD- An inflatinary hedge or a safe haven buy?
Source: Edelweiss Investment Research
Conventional wisdom says that higher interest rate is bad for precious metals. However, the above chart
paints the different picture. Historically, we have seen rising U.S. inflation and rising interest rate spurred the
rally in to yellow metal during 1971-1980. In fact, we observed that during the period of lower interest rate
cycle, Gold prices underperformed other asset class (Phase B). The period of 2002-2008 was again marked by
rising inflation and interest rate cycle which led to tremendous rally in Gold. The current decade till now has
seen underperformance of Gold as interest rate cycle has remained low on global crisis. However, since last
year we have seen an uptick in U.S. interest-rate cycle on improving inflation and so is the rebound in gold
prices. Going ahead, rising inflation and interest rate cycle should kick start the rally in precious metals?
Source: Bloomberg.
As per Elliot wave theory, international gold prices ended its 5 wave decline in early 2016 which marked the
bottom for gold prices at $1044.00. Since then, gold price is rising in corrective wave abc. While waves a and
b are completed, corrective wave c is in progress which would take the gold prices higher towards $1450.00
as per wave equality.
Elliot wave theory targets
$1450 on upside for Gold
prices.
Conventional wisdom says
that higher interest rate is
bad for precious metals.
However, History tells us
that higher interest rate has
spurred the rally in precious
metals.
7 Edelweiss Investment Research – Trading Desk
Global Gold Miners Index Equal Weighted
Source: Bloomberg.
The BI global gold mining competitive peer group is an equal weighted index showing us the price
performance of the top 50 gold mining companies in the world. The chart shows us a structural reversal in its
down trend since the bottom of 2016. Currently the index has broken out of a consolidation only to resume
its uptrend.
Silver Demand: All Industries
Source: Edelweiss Investment Research
The demand for solar PV usage is becoming a key component for the silver market. The fastest growing
industrial segment for silver has been its use in Photovoltaic (PV) panels for solar energy. Silver demand for
photovoltaic (PV) is rising against its other industrial uses since last few years. Photovoltaic (PV) demand for
silver surged in 2016 to 2,382 TN, up 34% from the previous year. This growth was the strongest since 2010
and was driven by a 49% increase in global solar panel installations, fuelled largely by a doubling of annual
solar panel installations in China and the United States. According to the study by CRU Consulting, it
estimates strong growth in silver PV demand over the next 5 years with an annual average of 114 million
ounces. Peak consumption of 148 million ounces is forecast in 2018 which is twice that of 2015 demand.
0.0
2.5
5.0
7.5
10.0
12.5
15.0
15000
16000
17000
18000
19000
20000
21000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E
All industrial use (tonnes, LHS) % demanded by photovoltaics
Global Gold Miners Index is
resuming its upward move
after consolidation
Growing demand for Solar
Energy would surge the
demand for Silver- as a key
component for Photovoltaic
(PV) in solar panel installation.
8 Edelweiss Investment Research – Trading Desk
SILVER – Tighten your Seat Belt
Source: Bloomberg.
Time cycle analysis in Silver reveals that price marks an important or major bottom every 7th year, following
which leads to a massive rally in silver prices. Every 7th year bottom is marked by more than 60%
retracement of previous up move. Silver prices have retraced more than 60% of its previous up move of
2008-2011 and has bottomed last year in 2016 which was a 7th year since last bottom. So, are we ready for
the Drive/Rally?
Source: Bloomberg.
Silver prices marked the bottom of $13.89 in early 2016 and is now progressing in its major corrective wave
abc as per Elliot wave theory. While wave a and b are completed, wave c is expected to target $22.00-$23.00
on upside as per wave equality.
Silver prices marks an
important bottom every 7th
year after retracing more
than 60% from its previous
up move.
As per Elliot wave theory,
Silver price could test
$22.00-$23.00 in coming
months.
9 Edelweiss Investment Research – Trading Desk
Palladium
Source: Bloomberg.
Palladium prices have been outperforming the precious metals ever since the bearish trend which began in
2011. Post 2016 bottom, prices have shown strength and has now rallied towards 17 year’s high. The price
action of Palladium during last 17 years has led to a formation of Bullish Cup & Handle pattern, which
projects a massive upside target in coming years.
Platinum
Source: Bloomberg.
While Palladium is outperforming the precious metals, Platinum has remained the underperformer. Platinum
prices found support near its previous lower level. The rebound in Platinum post 2016 low has formed an
impulsive price action on charts indicating strength. Platinum is consolidating since last few months and a
rally in other precious metals should ignite a fire in this underperforming metal.
Rally in other precious
metals would fuel a rally in
this underperforming
metal
Palladium witnesses a
breakout from Cup &
Handle pattern, formed
over a period of 17 years.
10 Edelweiss Investment Research – Trading Desk
Gold W.R.T Curruncies of its Major Producers
Gold/Chinese yuan
Source: Bloomberg.
China is the largest gold producer among its peers producing almost 1/3rd
more than the next competitor.
The Gold to CNY ratio has been consolidating in a tapering range in the last couple of years but currently it
stands at an inflection point and has broken out of this consolidation. This indicates that gold has been
outperforming the pair in the long term and will now resume its uptrend.
Gold/Australian Dollar
Source: Bloomberg.
Although Gold production in Australia took a bit of a tumble last year, dropping from 278 MT in 2015 to 270
MT in 2016 it still stands as the second largest producer of gold. The GOLD/Australian dollar ratio is forming
a cup & handle pattern signaling an end to its consolidation period. After a consolidation of 7 years gold is
set to break out and outperform the currency.
Gold/CNY ratio coming out
of its extreme
underperformance.
GOLD/AUD ratio
forming a Cup & Handle
Pattern.
11 Edelweiss Investment Research – Trading Desk
Gold/Russian Ruble
Source: Bloomberg.
With roughly ⅙ of the world’s landmass, Russia is definitely one of the major producers. According to the US
Geological Survey, Russia’s gold reserves stand at 8,000 MT, second only to Australia at 9,500 MT. The ratio
is trading in a long term upward channel. Gold has been underperforming the currency in the 12 months and
is currently at its extreme underperformance and channel support. We expect a reversal from these levels
and gold to outperform the currency.
Gold/Canadian Dollar
Source: Bloomberg.
Gold production in Canada rose noticeably in 2016. Last year, the country reported output 170 MT of gold,
compared to 153 MT in 2015. GOLD/CAD ratio has formed a cup & handle pattern similar to GOLD/AUD
indicating an end of a 7 year consolidation. All the above charts of Gold W.R.T their currencies indicate that
either gold is at its extreme underperformance or at a verge of breakout. This further strengthens our
hypothesis that gold would lead the precious metals pack and a structural uptrend would be established in
gold.
GOLD/CAD forming a Cup &
Handle Pattern.
Gold/RUB ratio breaking out of
its extreme underperformance.
12 Edelweiss Investment Research – Trading Desk
Nifty – Enduring a trading range
Source: Bloomberg.
In the above chart, we have presented long term view on Nifty. We have used Elliott wave principle to
analyze and forecast market trend by identifying extremes in investor psychology, highs and lows in prices,
and other collective factors.
The current wave structure indicates that we are currently in the final impulsive leg which is likely to end at
11500 level. Nifty remains in long term bull market trajectory. Thus any correction within this up trend will be
short lived and eventually market will turn northwards.
Source: Bloomberg.
As mentoined in our previous Chartwatchers edition, Nifty is currently progressing in wave (iii) of larger
degree Wave (V). Wave i of (iii) started from 6800 level and ended near 9000 level. Wave (iii) as we
expected, as per wave equality ended at 10150 level. Index is now undergoing correction which could exibit
traingle or flag pattern. Wave iv should end in the territory 9700-9600 Thus, corrections in Index will
conitnue to remain buying opportunity.
Nifty in long term bull
trajectory
Short term structure tell us
that Index will undergo
consolidation
13 Edelweiss Investment Research – Trading Desk
Sector outperformers
Source: Edelweiss Investment Research
We have analyzed sectors which declared their Q1 results and shortlisted a few sectors which have
outperformed their peers in the NSE500 basket. Retail sector has outperformed its peers in terms of PAT
which has posted good growth this quarter. Looking at the trend of PAT and sales on a TTM(trailing twelve
month) basis the sector has broken even in Q1 last year, while sales have been consistently growing. The
stocks included in this sector are ABFRL, TRENT & FUTURE RETAIL. The other sectors which have shown
significant delta in absolute terms are the Non Ferrous Metals and Cement Sector. Non Ferrous metals have
seen their PAT increase by 30% compared YoY TTM basis. Stocks like HINDALCO, HINDZINC & NALCO and
HINDCOPPER are included in this pack. Cement sector has seen an overall growth of 10% in its PAT compared
YoY on TTM basis. Non Ferrous Metals and Cement Sector are a part of the Materials Index according to GICS
(global industry classification standard) the underlying fundamentals in the two sectors have shown some
positivity.
4.6% 5.4% 7.5%
5.2% 3.5% 4.7% 4.0%
18.4%
11.5% 8.6%
4.2% 4.9% 3.7% 3.8%
Ret
ail
Cab
les
No
n F
erro
us
Met
als
con
sum
er d
ura
ble
s
Cem
ent
Cas
tin
gs, F
org
ings
&
Fast
ner
s
Rea
dym
ade
Gar
men
ts/
Ap
par
ells
Change in SALES & PAT compared to Last Quarter
Sales PAT
0
500
1000
1500
2000
2500
3000
3500
0
5000
10000
15000
20000
20
14
03
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(PA
T)
Sale
s
Non Ferrous Metal Sector Trends
Average PAT Average Sales
200
250
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350
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450
500
550
600
650
3000
4000
5000
6000
7000
8000
9000
2014
03
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2015
03
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2015
12
2016
03
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06
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03
2017
06
(PA
T)
Sale
s
Cement Sector Trends
Average PAT Average Sales
-100
-50
0
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250
0
2000
4000
6000
8000
10000
2014
03
2014
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2015
03
2015
06
2015
09
2015
12
2016
03
2016
06
2016
09
2016
12
2017
03
2017
06
(PA
T)
Sale
s
Retail Sector Trends
Average PAT Average Sales
Cement, Non ferrous
metals and Retail Sector
have outperformed its
peers
14 Edelweiss Investment Research – Trading Desk
Sectors to Watch – The Materials Index
Source: Bloomberg.
The NSE 100 Materials Sector is a GICS (Global industry classification standard) Sector index created giving
equal weights to the prices of stocks that are classified under the material sector. The Index is at its 9 year
trendline support breaking out of a minor consolidation. The index has stocks mainly from metals, cement
and paint sectors. Further more we individually like the sectors purely on charts.
Cement Sector – “Near to a New High”
Source: Bloomberg.
The above index consists of the large cement players in India with equal weights. The Index is near to its new
highs and has been consolidating for the last 6 months. This quarter also seen the cement sector post good
results. Further more the cement stocks outperformed the market when Nifty corrected towards 9700. The
sector could see a substantial rally from these levels.
Materials Sector at its
inflection point.
Cement Sector trading at
an all time high level.
15 Edelweiss Investment Research – Trading Desk
Paint Sector – “Broken out to a new High”
Source: Bloomberg.
The above chart is an equal weighted index ASIAN Paint, Berger Paint & Kansai Nerolac, the index has broken
its pre demonitization highs after a year worth of consolidation, the similar patter was previous noticed in
2015-2016. If the previous breakout target could be compared the index could see an upside till 750-800
levels.
Metals Index – “At 10 Years High”
Source: Bloomberg.
The Index is currently made a new 6 year high this month and simulatneously broken out of its 10 year
consolidation triangle. Metals stocks have been delivering good results since the last few quarters especially
the non ferrous metal stocks like Hindalco, Hindzinc and Hind Copper. As indicated in our previous chart
watchers we still hold a view of 4500 in the medium to near term on the metal index.
Paint Stocks make a new
high.
Metal Index Breaking out
of a 10 year consolidation
triangle.
16 Edelweiss Investment Research – Trading Desk
Dalmia Bharat – Buy
Source: Bloomberg.
The stock has broken out to a new high after completing a consolidation of 14 weeks and a drawdown of
10%. MACD has bounced from zero level indicating a bullish momentum to take the stock higher towards
3100.
Asian Paints – Buy
Source: Bloomberg.
The stock has given a break out of its consolidation phase and is currently trading near to its all time high
levels. MACD has shown a bullish signal after reversing from zero levels. A break above 1220 could get the
stock in the momentum and take it towards 1350.
Dalmia Bharat–
Accumulate at current
levels for a target of 3100.
Asian Paints- Accumulate
at current levels Target
1350
17 Edelweiss Investment Research – Trading Desk
Hindzinc – Buy
Source: Bloomberg.
While Base Metal commodities still trend higher, the metal pack has taken off. Compared to its peers
Hindzinc has not achived a good return in the last few months. Currently The stock has shown a breakout and
could catch up with the other metal stocks. Overall on the long term the stock is trading in an upward sloping
channel. We could see a conservative target of 360.
Glenmark – Sell
Source: Bloomberg.
Pharmaceutical stocks have not yet come out of their bearish trend. We believe Glenmark is one stock which
traders can look to sell for the downside target of 10% or more. The Stock is making lower high and lower low
on the weekly chart, indicating downtrend. Stock recently tested its resistance which earlier was a strong
support
Hindzinc – Accumulate at
current levels for a target
of 360.
Glenmark – sell at current
levels for a target of 510.
18 Edelweiss Investment Research – Trading Desk
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Disclaimer
19 Edelweiss Investment Research – Trading Desk
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20 Edelweiss Investment Research – Trading Desk
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