The document provides an equity market outlook and analysis for the period of Diwali to Diwali (October 2016 to October 2017). It notes that large caps underperformed with returns of 5-6% last year while midcaps saw stronger returns of 19-20%. For the current year, it expects lower double digit returns for large caps and 15-20% returns for mid and small caps. It recommends focusing on sectors with good private demand like financials, automobiles, and consumer durables. Large caps are seen as providing stability but lower returns compared to midcaps where returns of 15% are expected over the next year for those with a higher risk appetite and 2-3 year investment horizon.

1. THE WORLD THIS WEEKTHE WORLD THIS WEEK
October 24 – October 28, 2016

2. EQUITY VIEW

3. EQUITY VIEW
• A year back i.e. diwali to diwali large cap had remained pretty subdued. Large cap indices whether Nifty or Sensex
gave about 5-6% returns that too on the back of 6 monthly returns of 10%. Therefore, very clearly returns in the
first half of the year were not great then they were better and for the last one month returns remained subdued.
• Midcaps were pretty strong with returns of about 19-20%. Small cap returns were also in double digits. The six
monthly returns were nearly 18-20% and YTD 2016 is also good. Thus if we see from new year to new year
midcaps have shown great numbers unlike the large caps.
• Large caps will continue to underperform in comparison to midcaps. However the expected return this year will not
be 5-6%. We can expect at least lower double digit returns because in the two quarterly earnings season that we
have seen so far results have been positive and hence valuations have come down. This gives hope that large cap
indices should at least give 10-12% returns for the year down the line.
.

4. EQUITY VIEW
• The growth rate for midcaps has been strong which is actually giving a good earnings growth rate and keeping
PEG ratio in momentum. Midcaps should also give about 15-20% compounded returns. Over the next one year
also 15% returns is expected. There is expectation for 10-12% returns for large cap and 15-20% for mid and small
cap indices. This is the sort of broad outlook one can have diwali to diwali.
• In the past month large caps have been negative mainly because of the impending US elections. A debate is going
on with respect to the results of the elections. Initially Hilary had a good lead but recently Donald is making up
quite well which is creating some sort of a panic in the market that if Donald wins, the markets would crash
globally. This would also affect certain sectors like IT and Pharmaceutical in India.
• Domestic macros core sector data has been surprising showing a growth of 5% against 3.2%. This data is very
volatile so one month gives no indication whether the recovery has begun or not. However, if such a number
remains steady for the next couple of months and if inflation remains benign then these two things can lead to a
massive benefit for the Indian economy.

5. EQUITY VIEW
• Auto numbers will release today which will continue to be strong. In October i.e. the diwali month there was lot of
inventory build up. November might be disappointing but it is too early to discuss. October numbers were very
good. Some of the leading players like Maruti and Hero Motor Corp should come out with fantastic numbers. Thus
we continue to remain bullish on auto and other segments like consumer durables and quasi infra segment.
• The sectors with good private demand and consumption should be focused on rather than aiming for early or• The sectors with good private demand and consumption should be focused on rather than aiming for early or
bottom up stock picking. Financial, Automobile and Consumer Durable sectors should be focused on while
investing. Investment horizon should at least be 2-3 years and focus should be on midcaps.
• Large caps will continue to give safety and stability to the portfolio but returns will continue to be around 10-12%.
Thus if one has a risk appetite for staying invested for 2-3 years, focus should be on midcaps.

6. NEWS

7. DOMESTIC MACRO
• Gold prices stayed firm on Wednesday (i.e. 26th October) as stronger physical demand for the precious metal,
ahead of India's late-October festival season, offset a steady U.S. dollar. Demand for bullion is expected to pick up
ahead of festivals such as Dhanteras and Diwali, which is also a time when gold is traditionally given as a gift. A
recovery in physical demand provided the foundation for the rally that carried over into later trading," HSBC
analyst James Steel said in a note.analyst James Steel said in a note.
• The Reserve Bank of India (RBI) relaxed guidelines on what domestic interest rate futures can be offered on
Friday (i.e. 28th October), allowing banks to hedge their short-term interest rate exposure. Until now, banks could
not hedge their interest rate risk on active government bond benchmarks other than 91-day treasury bills.
Registered exchanges can select the underlying instrument or interest rate of new contracts, subject to RBI
approval, the central bank said in a circular.

8. GLOBAL MACRO
• With a more than trillion euro fuel injection and no interest rates worthy of the name, the
euro zone economy is stirring, more data confirmed on Friday (i.e. 28th October), leaving
policymakers hunting for signs the nascent recovery is sustainable.
• The European Central Bank will provide stimulus until a sustained inflation rebound, even
as its unprecedented measures come with side effects and face constraints, two
EURO
policymakers said on Friday (i.e. 28th October), just as the bank is contemplating more
easing. Facing stubbornly low inflation, the ECB will decide in December whether to
extend its 80 billion euro per month asset buys beyond its scheduled end next March,
having to balance diminishing costs with increasing side effects.

9. GLOBAL MACRO
• U.S. labor costs maintained a steady pace of increase in the third quarter, showing
little signs of a significant pickup in wage inflation. The Employment Cost Index, the
broadest measure of labor costs, increased 0.6 percent after a similar gain in the
second quarter, the Labor Department said on Friday (i.e. 28th October). That left
the year-on-year rate of increase at 2.3 percent.
• New orders for U.S. manufactured capital goods unexpectedly fell in September
UNITED STATES
• New orders for U.S. manufactured capital goods unexpectedly fell in September
amid weak demand for computers and electronic products, which could temper
expectations for an acceleration in business spending in the fourth quarter. The
Commerce Department said on Thursday (i.e. 27th October) that non-defense
capital goods orders excluding aircraft, a closely watched proxy for business
spending plans, fell 1.2 percent after three straight months of strong gains. The so-
called core capital goods orders increased by an upwardly revised 1.2 percent in
August.

10. GLOBAL MACRO
• Activity in China's manufacturing sector expanded at the fastest pace in more than
two years in October, adding to views that the world's second-largest economy is
stabilising thanks to a construction boom. The official Purchasing Managers' Index
(PMI) stood at 51.2 in October, compared with the previous month's 50.4 and
above the 50-point mark that separates growth from contraction on a monthly
basis.
CHINA
basis.
• China's new home prices rose in September at the fastest rate on record as buyers
rushed to close contracts before new restrictive measures took effect in October.
The property market, accounting for around 15 percent of gross domestic product,
contributed handsomely to third quarter economic expansion of 6.7 percent.

11. INDICES
Date Sensex Midcap Auto Bankex CD CG FMCG HC IT Metals O&G Power Realty Teck
24-10-2016 28,179 13,585 22,432 22,722 12,725 15,000 8,521 16,343 10,253 10,335 12,441 2,029 1,551 5,616
25-10-2016 28,091 13,544 22,336 22,779 12,783 14,921 8,451 16,419 10,167 10,293 12,381 2,027 1,548 5,584
26-10-2016 27,837 13,421 22,193 22,347 12,834 14,870 8,441 16,236 10,111 10,151 12,311 2,008 1,537 5,567
27-10-2016 27,916 13,282 21,892 22,330 12,704 14,787 8,488 16,255 10,032 10,075 12,222 1,999 1,531 5,525
28-10-2016 27,942 13,408 22,168 22,384 12,756 14,874 8,515 16,374 9,995 10,286 12,296 2,008 1,552 5,505
-0.84% -1.30% -1.17% -1.49% 0.24% -0.84% -0.07% 0.19% -2.52% -0.48% -1.16% -0.99% 0.04% -1.96%

12. COMMODITIES AND CURRENCY
Date USD GBP EURO YEN Crude (Rs. per BBL) Gold (Rs. Per 10gms)
24-10-2016 66.86 81.67 72.80 64.43 3402.00 29959.00
25-10-2016 66.88 81.77 72.79 64.06 3378.00 30002.00
26-10-2016 66.76 81.36 72.82 64.13 3341.00 30095.00
27-10-2016 66.89 81.69 72.94 63.93 3283.00 30072.00
28-10-2016 66.86 81.30 72.91 63.44 3326.00 30049.00
0.01% 0.46% -0.15% 1.54% 2.23% -0.30%

13. DEBT
Tenor Gilt Yield in % (Friday) Change in bps (Week)
1-Year 6.46 -12
2-Year 6.56 -1
5-Year 6.71 -2
10-Year 6.89 4

14. KIASL TEAM
Shantanu Awasthi
Head- Advisory
Shantanu.awasthi@Karvy.com
Nupur Gupta
Lead Advisor
Nupur.gupta@Karvy.com

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