The CNX Consumption
FDI in retail has been a hot topic of discussion for the winter session of the parliament. The approval of 51% FDI in multi-brand retail by Lok Sabha and Rajya Sabha has been perceived positively by the market. Sensex and Nifty hit their highest levels in 19 months after the approval. Subir Gokarn, RBI Deputy Governor views this step to have a positive impact in inflation management. The pre condition that half of any investment has to be made in infrastructure like cold-storage chains and warehouses will help reducing supply side bottlenecks.
As we have earlier said in (The crazy consumption 1) and (Garam Masala Mix), the demand side in India already offers huge opportunity to boost consumption and growth of the economy. We have seen outperformance in sectors like FMCG, healthcare, banking and automobile. These developments witness the increasing consumerism in India. The consumption story can also be witnessed globally. SPDR S&P Retail Index (XRT) generated annual return of around 23% and has been up over 222% over the last 5 years. This makes the XRT a top performing sector among US sectors. ORMI ETF Sector 5 is still running positive for XRT even after 1421 days.
India makes a more compelling case for high consumption demand as it is reaping benefit in terms of demographic dividend. The majority of population in India is young (below age of 30). This reduces the dependency ratio too, as number of old people dependent on younger population is low. Low dependency ratio leaves more disposable income in hands of people. Changing women’s role and participation in the labour economy also adds to consumerism. Over the past few years, consumer sentiment has changed. From being more debt averse, people are now ready to buy more and more by loans or through credit cards. Cheaper and easy availability of credit has also spurred consumption growth.
Relative Performance
The CNX consumption index has relatively outperformed compared to Nifty since April 2012. The pace of outperformance accelerated from end of October 2012. More than half of the sector has quarterly Jiseki ranking above 50 percentile. This means that the components in this sector have already performed well and are not undervalued. However the positive momentum seems to continue. 22 out of 29 components are showing both positive price signals and positive Jiseki signals. This suggests that the sector still has potential to perform well. This makes a case to identify sector components which can still be a good BUY.
The plot below displays CNX Consumption and Nifty.
The plot below displays the relative performance of CNX Consumption vs Nifty.
Recommendations
In the consumption sector we recommend Pantaloon Retail, Asian Paint and many other stocks. Below we discuss these stocks based on their Jiseki cycle and rankings. The proprietary ranking methodology looks at numerous performance criteria such as price performance, relative out performance, Jiseki rankings etc.
Pantaloon Retail(BOM:523574)
Pantaloon Retail is ranked 27 based on Orpheus proprietary ranking methodology which makes it the third best performer in the sector. The stock has a positive price trend and positive Jiseki cycle since the last 70 days generating 16.8% return for the period.
From a quarterly Jiseki performance ranking perspective also the stock is below 10 percentile which suggests among the BSE 500 stocks Pantaloon is still undervalued. The P/E ratio for the stock is 28 which is lower than 31(average P/E) of CNX consumption Index. The ROE of the stock is 4.7%.
Asian Paint(BOM:500820)
Asian Paints is ranked 21 based on Orpheus proprietary ranking methodology. The stock has generated returns of approx 9% in the signal holding period of 72 days. The P/E ratio for the stock is 36. The ROE of the stock is 40%.
System generated review levels (technical cases)
In keeping up with the tradition of automating technical patterns and levels, here we have modeled resistance and supports based on previous intermediate multi week trend.
To improve signal quality we have modeled review levels based on key resistance and support levels. The entry for ORMI India 30 only happens if the price is either above a key support or above a key resistance.
The review levels are classified with different widths, the widest one is the most relevant, closer to price action and vice versa.
Technical Review
Pantaloon Retail is above its resistance level of 200. The stock has already seen a peak around 800. Price at current level should go up.
Asian paints has crossed its resistance level of 4035. Stock is at its all time high, price should go higher.
Summary
We have 22 running total positive (both Jiseki and price signal positive), 1 running total negative (both Jiseki and price signal negative) and rest neutral (both Jiseki and price signal non-confirming).
Positives (23)
There are 23 components that are positive on both price and Jiseki cycle. 10 components have generated returns more than 10%. Among these components, United Spirits generated return of 148.9% in the signal holding period of 149 days. All total positive components generated positive gains except Apollo Hospitals and Reliance Industrial Infrastructure Limited.
Negatives (1)
There is one component that is negative on both price and Jiseki cycle and that is Shree Renuka Sugar.
Non-Conforming (5)
This leaves us with 5 components that have a non-confirmation between price and Jiseki cycle filters.
Please find below the respective technical charts.
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Indexing: The INDIA 30 Orpheus Risk Management Index (ORMI) is based on proprietary algorithm.
The indices values that are disseminated today are broadly based on market capitalization methodology. Market capitalization methodology has been challenged globally for a few broad reasons. 1) As an asset strengthens it is given more weight 2) As an asset weakens it is given lesser weight. This on one side captures momentum but on the other side suggests investors to focus more on growth compared to value. This increases portfolio risk when market growth slows down or reverses, as has been the case since 2007. When markets contract, the erstwhile top performers push into red for extended period of time causing large drawdowns and emotional pain.
The India 30 Index is based on the above extreme reversion idea i.e. outliers tend to reverse, which suggests that investing is about value picking and extremes are prone to reversion. Our Index extends and fine tunes the idea first mooted by De Bondt and Thaler in their 1981 paper suggesting that 3 year worst losers portfolio tends to outperform the 3 year best winners portfolio.
Coverage India: CNX100, BSE500 traded stocks and Indian Indices.
Ayushi has done her masters in economics from Delhi School of Economics and then completed her Post-Graduation in Finance from National Institute of Securities Markets. She completed her graduation in Economics from Lady Shri Ram College. A keen econometrician, Ayushi enjoys financial modeling and risk management.