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Monthly Equity Commentary Monthly Equity Commentary

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1-1.S&P BSESENSX.BSE - 04/08/14 Trend7

Daily

Month Gone By • The Benchmark indices ended positive for the month of June 2014. BSE Sensex rose by

1.9% and Nifty closed higher by 1.4% for the month. Frontline Indices: Week

No % Chg

Key Positives Key Negatives Sensex Nifty

1 +2.16 +1.84

• Indices edged higher on expectations of a growth oriented Budget and decline incrude oil prices which triggered gains on the bourses.

• Services activity in India rose to a 17-month high in June on the strength of robustorder flow indicating rising optimism in the sector that has a share of more than60% in the economy. The HSBC PMI rose to a vigorous 54.4 points in June from 50.2in May.

• The electrical equipment industry grew byjust 3.5% in the last fiscal mainly due tolack of orders from utilities which facedliquidity crunch, industry body IEEMA said.

2 -3.61 -3.77

• Showing signs of recovery, industrial production grew at 19-month high of 4.7% inMay due to improved performance of manufacturing, mining and power sectors andhigher output of capital goods. Manufacturing, which constitutes over 75% of theindex, grew 4.8% in May, compared to decline in output by 3.2% a year ago.

• The market slumped as investors bookedprofit after a strong rally in the past fewmonths. The new Indian government'smaiden Budget on 10 July 2014, fell shortof the hype.

Monthly Strategy Report – August 2014

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3 +2.47 +2.74

• Key benchmark indices rose in the week as latest data showing retail inflationeasing in June 2014, decent growth in merchandise exports in June 2014 andReserve Bank of India's (RBI) incentives for banks to raise long term bonds forfinancing infrastructure projects boosted sentiment.

• India's merchandise exports jumped 10.22% to $26.48 billion in June 2014 overJune 2013. India's foreign exchange reserves rose by $643.2 million to $317.03billion for the week ended July 11.

• The trade deficit stood at $11.76 billion inJune 2014, which was higher than tradedeficit of $11.28 billion in June 2013.

4 +1.89 +1.65

• Foreign Portfolio Investors (FPIs) have pumped in over Rs 1.22 lakh crore in Indianstock markets during the first six months of this year. Investments in Indiansecurities (equity and debt) made by Foreign Institutional Investors (FIIs)/FPIs in2013 was Rs 62,288 crore.

• Foreign exchange reserves surged for the seventh straight week, rising by $813.2million to $317.85 billion in the week ended July 18 on the back of a healthy rise inthe core currency assets.

5 -0.89 -0.89

• The HSBC India Manufacturing Purchasing Managers' Index (PMI), a measure offactory production, rose to 53.0 in July, up from 51.5 in June, signalling a solidimprovement in business conditions.

• Deficit in monsoon rains has come down and good rainfall is expected in thecoming days that will help complete sowing operations and as per the MetDepartment, the overall rainfall deficit has come down to 25 per cent till July 23.

• India's annual infrastructure sector growth hit a nine-month high of 7.3% in June,led by a surge in cement and electricity output.

• Weakness in global stocks weighed on thedomestic bourses in the week

Global markets:

Indices Jun-14 Jul-14 % Change

US - Dow Jones 16827 16563 -1.6

US - Nasdaq 4408 4370 -0.9

UK - FTSE 6744 6730 -0.2

Japan - Nikkei 15162 15621 +3.0

Germany - DAX 9833 9407 -4.3

Brazil - Bovespa 53168 55829 +5.0

Singapore - Strait Times 3256 3374 +3.6

Hong Kong – Hang Seng 23191 24757 +6.8

India - Sensex 25414 25895 +1.9

India - Nifty 7611 7721 +1.4

Indonesia - Jakarta Composite 4879 5089* +4.3

Chinese - Shanghai composite 2048 2202 +7.5 *As on 25th July 2014

• World markets ended the month of July 2014 with a mixed performance. While the standout performers were Shanghai and Hang Seng both rising by 7.50% and 6.80% respectively, the other list of gainers included Bovespa, Jakarta Composite, Strait Times, Nikkei, Sensex and Nifty, all were up by 5.0%, 4.3%, 3.6%, 3.0%, 1.9% and 1.4% respectively. Other indices like DAX, Dow Jones, Nasdaq, and FTSE fell by 4.3%, 1.6%, 0.9% and 0.2% respectively.

• Average daily volumes on BSE during the month of July 2014 fell by

14.8% M-o-M. (NSE daily average volumes fell by 11.4% M-o-M). The average daily derivatives volumes on NSE rose by 8.6% to Rs. 225938.38 cr in July.

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• The performance of the sectoral Indices was mixed bagged. The top two gainers were Healthcare and FMCG, which rose by 7.7% and 7.4% respectively. The top two losers were Capital Goods and Realty which fell by 9.6% and 8.9% respectively

BSE Indices 30-Jun-14 30-Jul-14 % chg Remarks Sensex 25,413.8 25895.0 +1.9 Smallcap 10,203.2 9989.4 -2.1 Midcap 9,379.0 9188.2 -2.0 BSE 500 9,791.3 9831.5 +0.4 BSE 200 3,124.4 3144.8 +0.7 BSE 100 7,742.7 7799.7 +0.7

Auto 15,249.3 15490.7 +1.6 • Vehicle sales across categories registered an increase of 12.15% to 15.78 lakh units in June2014 over June 2013.

Bankex 17,475.1 17485.6 +0.1

Capital Goods 16,200.2 14651.6 -9.6 • The index fell due to subdued results from the capital goods companies for the quarterended June 2014. The main contributor to this fall was L&T which fell around 11.42%.

Consumer Durables 8,870.0 8556.9 -3.5

FMCG 6,676.2 7169.8 +7.4 • FMCG stocks rose on revival of monsoon rains. FMCG firms derive substantial revenue fromrural India. HUL surged 6.43% and index heavyweight ITC rose 3.76%.

Healthcare 11,462.2 12341.3 +7.7

• As the market was seeing some pressure on the cyclicals in terms of profit booking and FIIswithdrawing their investment on the back of global cues, healthcare being a defensive play,saw a positive momentum. Among the leading packs were Torrent Pharma, GlenmarkPharma and Lupin due to good set of Q1FY15 results delivered by all.

IT 9,346.1 9742.3 +4.2 • Recent data reaffirms improving health of the US economy that boosted IT stocks. US is thebiggest outsourcing market for the Indian IT firms

Metal 13,100.0 13064.3 -0.3 • Metal and mining stocks rose as latest data showed acceleration in China's GDP growth to

7.5% in Q2 June 2014, from 7.4% in Q1 March 2014. However, this rally came to an end dueto profit booking in some counters.

Oil & Gas 11,150.9 10749.8 -3.6

• The sector had a mix bagged performance by the companies. RIL dipped by about 5% onconcerns about the penalty on KG D6 issues and delay in increase of gas prices. Some of theupstream companies stock prices fell as the Government hiked the upstream fuel subsidyburden.

Power 2,318.7 2133.6 -8.0 • NTPC fell by 5.51% owing to a decline in profit in Q1FY15 results due to the new tariffregulation. Also selling pressure was seen in this index due to profit booking.

PSU 8,633.6 8012.1 -7.2

Realty 2,077.1 1893.3 -8.9 • DLF dropped in volatile trade after the company's weak Q1 results. Shares of other realtycompanies also declined after DLF's weak Q1 results

TECK 5,266.4 5488.1 +4.2

Sectoral performance:

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Fund Activity

Particulars Net Buy / Sell Net Buy / Sell Open Interest Open Interest

Remarks June -14 July –14 June -14 July –14 FII Activity (Rs. in Cr) FII Activity (Rs. in Cr)

Equities (Cash) +10905.3* 11413.6 • FIIs continued to be large net buyers in July. Index Futures -2061.2 +322.8 11312 10294 • FIIs were small net buyers with a fall in open interest. Index Options +9388.6 +3575.5 43729 42012 • FIIs were net buyers with flat open interest. Stock Futures -541.9 +5066.4 55569 49492 • FIIs were net buyers with fall in open interest. Stock Options -662.5 -456.8 1749 73 • FIIs were net sellers along with major fall in open interest.

MF Activity (Rs. In Cr) MF Activity (Rs. In Cr) Equities (Cash) +3339.6 +3630.2 • MFs were large net buyers in the month of July. *=till June 27 FIIs were net buyers of debt papers buying a net amount of Rs.23039 cr of debt papers compared to Rs.15820 cr worth debt bought in June.

• Indian G-Sec bond yields ended lower by 2 bps at 8.72% at the end of July 2014 over June 2014. The government bonds (G-Sec) remained bearish on persistent selling pressure from banks and corporates and the call rates ended lower at the overnight call money market due to subdued demand from borrowing banks amid tight liquidity conditions in the banking system. Bond prices ended lower as the participants were concerned over the government’s fiscal deficit target for the fiscal. Further, concerns over the bond auction and domestic inflation data also impacted the market. However, the market later witnessed gain tracking the auction cut-offs which came in line with expectations and value buying by the participants.

Bond Yields

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• In July 2014, the Reuters/Jefferies CRB Index of 19 raw materials ended lower by 4.47% to close at 293. The Reuters/Jeffries CRB Index fell on account of a fall witnessed in commodities like Natural Gas (down 15.4%), Cotton (down 13.9%), Corn (up 13.7%), Sugar (down 8.2%), Crude Oil (down 6.8%), Heating Oil (down 3.8%), Silver (down 0.39%), Gold (down 3.1%), Wheat (2.14%), Lean Hogs (down 0.5%), and Nickel (down 0.1%). However, Coffee, Aluminium, Live Cattle, Copper and Cocoa were all up by 10.8%, 7.3%, 7.0%, 2.7%, and 1.8% respectively.

• Behaviour of commodity prices (including LME 3 month buyer prices for base metals)

during the month ended July 2014 is given below. Most of the base metal prices closed positive for the month of July except Crude Oil, Gold and Nickel.

Behaviour of commodity prices (including LME 3 month buyer prices for base metals) during the month ended July 2014: Commodity 31-Jul-13 30-Jun-13 % Chg Reasons

Gold 1281 1321.8 -3.06%

• Gold fell to a six-week low as strong U.S. wage growth data and signs of an improving job market reduced theneed for safe-haven buying.

• It posted more a loss of nearly 3.06 percent for July, its biggest monthly loss this year, as the FederalReserve's reduced bond-buying stimulus and a better undertone in the U.S. economy decreased the metal'sappeal as a hedge.

• Gold hit a five-week low below $1,300 an ounce on speculation that U.S. job gains so far this year couldaccelerate the need for higher interest rates.

• Market analysts said the fall in gold futures was mostly in line with a weak trend overseas.

Crude Oil 98 105.37 -6.83%

• Oil Prices fell below $103, as geopolitical tensions in Iraq and Libya cooled to allay worries about petroleumsupplies.

• U.S. crude oil dropped putting the contract on course for its steepest monthly slide in nine months, asconcerns over weak demand rose while fears over supply shortages in the Middle East and North Africa ebbed.

• Oil prices dropped after Chinese manufacturing and U.S. employment gauges missed expectations and fueledconcerns over the strength of global economic recovery.

Aluminium 2020 1883.5 7.25%

• Aluminum prices rose to a 16-month high as stockpiles tracked by the London Metal Exchange slumped amidsigns of accelerating economic growth in China, the world’s biggest user of industrial metals.

• Firming trend in select base metals at the London Metal Exchange (LME) supported the upside. • Inventories tracked by the London Metal Exchange extended a slump to the lowest since 2012.

Copper 7120 6932 2.70%

Zinc 2370 2196 7.90%

• Zinc hit a three-year high as investors sought more exposure to commodities due to improved fundamentals,and encouraged by falling stocks and firm equity markets in Asia.

• Speculators built-up positions amid positive cues from the global market and better domestic demand. • Zinc prices rose to a 35-month high as inventories dwindled amid speculation that increasing auto sales

in China and the U.S. will boost metal use. • Zinc stockpiles monitored by the London Metal Exchange have dropped 29 percent this year to the lowest

Commodities

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since December 2010. Nickel 18775 18795 -0.11% Tin 22925 21875 4.80%

Lead 2246 2158 4.05% • Lead prices rose to a 17-month high on signs of lower global output from mines amid increasing demand for

the metal used in car batteries.

• The Baltic Dry Index (BDI) lost 11.18% in the month to close at 751.The index has experienced its falling trend since June mainly due to lower capsize rates. On a YoY basis, the index has declined by 34.5%.

• The USD ended on Positive note vs other currencies in July 2013. The US currency has

strengthened against all major currencies and its rally versus the British pound was boosted by weaker than expected housing market and confidence data from the UK.

Given below is a table that shows the depreciation (-)/appreciation (+) of the dollar against various currencies for the month of July 2014: USD to: 31-Jul-14 30-Jun-14 % Chg Reasons Pakistani rupee 98.80 98.81 0.0% Hong Kong dollar 7.75 7.75 0.0% Chinese yuan 6.17 6.16 0.1% Indian rupee 60.20 60.05 0.3% Taiwan dollar 30.03 29.88 0.5% Singapore dollar 1.24 1.25 -0.5% Argentine peso 8.20 8.14 0.7%

Euro 0.75 0.73 2.2%

• The euro fell to an eight-month low against the dollar after data highlighting the divergingeconomic performance of the U.S. and Europe provided investors with an excuse to sell the commoncurrency.

• The euro weakened against its rivals hitting fresh multi-month lows against the dollar and the yen,underscoring how the common currency is vulnerable to selling pressure ahead of major economicdata in the euro zone.

• It was the third monthly drop in a row and took the measure of sentiment in Europe's biggesteconomy to its lowest level since October 2013.

• The falling trend was halted after Germany reported a positive Purchasing Managers’ Index (PMI) forboth manufacturing and services sectors.

Thai baht 31.95 32.52 -1.8% Malaysian ringgit 3.19 3.21 -0.8%

Indonesian rupiah 11641.40 12000.00 -3.0% • The Indonesian rupiah led gains among regional units this month with a 3% appreciation against the

dollar, its largest monthly rise since February.

Currencies

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• Rupiah gained as the country reported a smaller-than-expected trade deficit in June, while inflationin July eased.

Japanese yen 102.39 101.55 0.8%

• The Japanese yen weakened on mildly downbeat remarks from the central bank and a downwardrevision in wage data.

• Japan’s currency dropped against 27 of its 31 major peers, with higher-yielding counterpartsincluding Brazil’s real and Indonesia’s rupiah gaining.

Brazilian real 2.24 2.20 1.8%

• Brazil’s real fell after a testimony from Federal Reserve Chair Janet Yellen added to concern theU.S. central bank may raise borrowing costs sooner than expected.

• The real dropped the most among major currencies as signs of financial stress in Portugal spurreddemand for a refuge in the dollar.

• Real dropped as a parent company of Banco Espirito Santo SA in Portugal missed some short-term

debt payments, sinking demand for emerging-market assets.

Korean won 1025.75 1015.33 1.0%

• The South Korean won eased to its lowest, pressured by the dollar's strength on the back ofresurgent labour cost data in the US.

• The greenback firmed after US labour costs recorded their biggest gain in more than 5-1/2 years,sparking investor speculation the Federal Reserve could raise interest rates sooner than expected.

(Source:www.oanda.com) Comparison of Equity Returns in various markets - MSCI Indices in US$ terms

MSCI Index Last MTD 3MTD YTD 1 Yr MSCI Index Last MTD 3MTD YTD 1 Yr BRIC 293.4 2.4% 10.3% 5.4% 13.9% EUROPE 1,750.1 -3.8% -3.9% -0.5% 12.8%

EM (EMERGING MARKETS) 1,065.8 1.4% 7.1% 6.3% 12.5% G7 INDEX 1,505.1 -1.7% 1.9% 3.1% 13.5%

EM ASIA 485.0 2.8% 9.3% 8.6% 16.5% WORLD 1,714.3 -1.7% 1.6% 3.2% 13.7%

EM EUROPE 403.0 -7.3% 1.7% -7.9% -3.7%

EM EUROPE & MIDDLE EAST 340.4 -5.5% 1.1% -8.5% -4.3% PORTUGAL 87.4 -15.8% -20.9% -12.0% -5.9%

EM LATIN AMERICA 3,399.4 0.9% 4.5% 6.2% 7.8% AUSTRIA 1,074.5 -11.8% -13.7% -15.8% -4.4%

GERMANY 2,071.1 -6.4% -7.0% -7.1% 11.3%

CHINA 66.0 7.3% 13.8% 4.6% 16.4% FRANCE 1,686.4 -6.1% -8.5% -3.5% 7.8%

INDIA 496.1 0.7% 14.2% 21.8% 30.5% ITALY 317.4 -5.4% -8.3% 6.6% 27.0%

INDONESIA 861.2 8.1% 6.8% 29.4% 0.1% NETHERLANDS 2,451.4 -5.3% -3.7% -4.9% 7.4%

KOREA 464.9 1.8% 6.5% 5.1% 21.1% BELGIUM 1,582.1 -4.1% -2.5% 1.6% 14.8%

MALAYSIA 515.0 -0.1% 1.6% 1.5% 5.1% SWITZERLAND 5,194.9 -4.0% -3.9% 0.5% 10.3%

PHILIPPINES 558.2 0.7% 5.2% 19.5% 4.3% NORWAY 3,234.2 -3.8% -1.1% 4.5% 10.7%

TAIWAN 318.6 -1.2% 7.4% 9.9% 16.4% ISRAEL 240.3 1.0% 4.8% 20.8% 27.7%

THAILAND 403.3 1.7% 5.0% 15.4% -0.2% AUSTRALIA 957.8 2.9% 2.8% 9.6% 15.6%

BRAZIL 2,430.6 1.7% 4.7% 9.6% 12.4% SINGAPORE 4,425.4 4.0% 5.2% 7.1% 7.1%

CHILE 1,722.5 -5.0% -4.9% -6.5% -10.0% HONG KONG 10,420.2 6.0% 10.5% 8.8% 16.3%

COLOMBIA 1,148.3 -0.1% 4.6% 10.6% 1.0%

MEXICO 7,122.2 1.2% 7.3% 2.1% 5.2% Frontier Markets

PERU 1,227.2 -0.7% 0.7% 11.4% 17.3% FM (FRONTIER MARKETS) 704.5 1.7% 6.6% 18.5% 27.1%

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CZECH REPUBLIC 373.6 -5.9% -6.7% 1.3% 10.6%

GREECE 114.1 -8.3% -10.1% -3.7% 27.0% UKRAINE 106.5 17.3% 34.7% 40.4% 34.3%

HUNGARY 384.4 -11.2% -9.5% -17.7% -24.3% KAZAKHSTAN 593.5 7.0% 15.4% 6.5% 16.4%

POLAND 841.9 -6.3% -7.7% -5.2% 3.7% SRI LANKA 248.2 6.4% 3.7% 8.5% 3.5%

RUSSIA 658.9 -10.9% 4.6% -16.3% -8.3% ARGENTINA 2,707.2 6.2% 22.1% 32.0% 96.7%

TURKEY 562.6 3.9% 10.8% 23.4% 3.9% BOTSWANA 834.4 4.9% 6.6% -3.5% 0.6%

EGYPT 812.9 11.5% 4.4% 20.3% 44.3% VIETNAM 468.2 4.0% 1.5% 13.4% 16.0%

SOUTH AFRICA 576.5 0.9% 5.6% 8.9% 16.7% BULGARIA 189.3 -6.3% -10.8% 7.3% 30.7%

QATAR 1,097.2 12.4% -2.3% 17.1% 23.5% SLOVENIA 359.0 -7.0% -0.3% 5.4% 17.9%

UNITED ARAB EMIRATES 544.1 16.9% -2.1% 35.3% 61.2% GHANA 1,080.5 -8.6% -19.8% -25.7% -23.6%

• Equity markets across the globe ended the month of July 2014 on a mixed note. Emerging markets closed mildly positive +1.4%, led by EM - Asia & EM – BRIC, up 2.8% & 2.4% respectively. Growth in EM – Latin America was moderate at 0.9%, while EM – Europe and EM – Europe & Middle East underperformed, reporting decline of 7.3% and 5.5% respectively. Among the developed market indices, Europe, G7 & World Index fell by 3.8%, 1.7% & 1.7% respectively. The Frontier markets rose moderately by 1.7%.

• Amongst the Frontier markets, Bulgaria, Slovenia and Ghana were the top three losers, which fell by 6.3%, 7.0% and 8.6% respectively. However, the index losses were restricted on the back of outperformance from Ukraine, Kazakhstan, Sri Lanka, Argentina, Botswana & Vietnam, which gained by 17.3%, 7.0%, 6.4%, 6.2%, 4.9% & 4.0% respectively.

• Ukraine stock markets rose as tensions over the downing of a passenger jet in Ukraine eased after pro-Moscow separatists released a train packed with bodies and handed over the aircraft's black boxes.

• Sri-Lankan markets had some great value opportunities as positive market sentiment and a conductive regulatory environment has driven market recovery since mid-2012. Strengthened by an improving economy, the stock exchange appears to be entering a new phase leveraged on strategy, innovation and a redefined business model. Sri Lanka exchange has been implementing new business growth plan.

• Argentina Stock Market surged despite Risk of Default. The reason that the market has surged is not due to any sort of fundamental changes in the economy. Actually it's the lack of strong fundamentals and the draw of high-risk, high-returns that come with a country that offers high bond yields. The stock market has enjoyed huge inflows of cash that look to buy high-yielding companies, especially those companies that are backed by the Argentinian

Global markets end on a mixed note; Emerging Markets and Frontier markets top gainers, developed markets underperform

Bulgaria, Slovenia and Ghana pull the Frontier markets lower; but Ukraine, Kazakhstan and Sri Lanka restrict index losses

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government. The Merval has surged over 60% since the year began, putting this exchange's returns at the top of a list of 40 global markets for 2014. Argentina's President Kirchner has tried to explain to investors that the $15 billion owed is equal to half of the entire central bank foreign exchange reserves, crippling its economy. Key components of the Merval Exchange are stocks like Petrobras, Banco Marco, and Telecom Argentina. Top performers for 2014 are EDENOR, Pampa Energia, and Frances. EDENOR, up 205% YTD and 756% in the past 12 months, is an electric utility company that distributes power to several municipalities in the Greater Buenos Aires metropolitan area.

• Ghana market fell as Gross Domestic Product (GDP) data for 2013 showed an overall growth of 7.1 per cent against a target of 8.0 per cent.

• Amongst the Emerging markets, EM - Europe & EM – Europe Middle East were the top losers,

down 7.3% & 5.5% respectively. • The gains in the EM – Latin America were led by Brazil & Mexico, which registered stable

gains of 1.7% & 1.2% respectively. While Chile, Peru and Columbia disappointed, declining by 5%, 0.7% and 0.1% respectively during the month.

• Brazilian market outperformed in July on signs of falling poll ratings for President Dilma Rousseff ahead of elections later this year. Rousseff’s economic policies and interference in state-run companies have been blamed for Brazil’s sluggish growth. The indices were further boosted by positive manufacturing data out of China—Brazil’s biggest trading partner.

• Chilean market underperformed, as Retail sales in Chile fell unexpectedly to an annual rate of 2.3%, from 4.9% in the preceding month. Analysts had expected Chilean Retail Sales to rise to 5.0% last month. Chile’s consumer confidence continued its drop to the first negative level in 2-years, as the peso fell after the central bank dropped interest rates to spur economic activity.

• The gain in the BRIC index was driven largely by China & Brazil (up 7.3% & 1.7% respectively). India grew marginally by 0.7%. However, Russia restricted gain due to sharp fall by 10.9%.

• Russia’s RTS fell sharply, down 10.9% on the back of rising geopolitical risks. Investors sold Russian stocks on fears that the scope and severity of western sanctions against Russian economic interests would be significantly expanded as the shooting down of a Malaysia Airlines jet over eastern Ukraine was linked to Moscow-backed Russian separatists.

• In China, sentiment improved as the latest GDP data showed that the Chinese economy had grown 7.5% in the second quarter compared to a year earlier, up from 7.3% in the first three

Brazil & Mexico drive Latin American index

BRIC markets up led by China but restricted due to sharp fall in Russia

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months of the year. Reports of a strong rise in industrial production in June, and a sharp increase in retail sales, suggest economic activity is picking up as we move into the second half of the year.

• Among the EM - Asia, Indonesia, China were the top gainers, up 8.1% & 7.3% respectively.

However, India, Korea, Philippines, & Thailand grew marginally by 0.7%, 1.8%, 0.7% & 1.7% respectively, while Malaysia and Taiwan underperformed, falling 0.1 and 1.2% respectively during the month.

• Indonesia's stock market and rupiah rose on investors' belief that Mr Joko Widodo would be declared the eventual winner of presidential election, thus allowing him to push ahead with his market-friendly policies.

• Taiwan’s TAIEX fell amid weakness for the market’s largest company, semiconductor maker TSMC, on concern over possible order losses.

• Among the EM – Europe & Middle East, Qatar & UAE were the top gainers, up 12.4% & 16.9% respectively in July. Turkey also outperformed, rising by 3.9%. In EM – Europe, Hungary, Russia, Greece & Poland were top losers, down 11.2%, 10.9%, 8.3% & 6.3% respectively whereas Egypt outperformed with robust growth of 11.5%.

• UAE and Qatar were recently upgraded to emerging market status. Qatar's bourse edged up after the country's central bank said property prices had climbed to a new peak.

• The U.A.E. bourses ended the month on a high note as Arabtec, the biggest builder in the United Arab Emirates, surged sharply after reacting downwards last month.

• Turkey’s stocks outperformed in July amid further signs of improvement in the country’s current account deficit, while Poland’s WIG rose 0.5%.

• Hungarian drugmaker Richter trimmed its operating profit margin outlook as a result of the dispute between Russia and Ukraine and a poor performance in Poland, three of its biggest markets.

• In Eastern Europe, returns were negative. Russia’s RTS dropped as the market closely watched the situation in eastern Ukraine, where Kiev-sent troops continued fighting with pro-Russian separatists. European Union is discussing tougher sanctions, including locking Russia out of the continent’s capital markets, although getting such measures approved across the board remains a challenge.

• Egyptian stocks were back in the green as foreign and institutional net-buying increased.

Indonesia and China drive the EM – Asia index; Taiwan underperforms

UAE & Qatar drives EM – Europe & Middle East index higher; Hungary top loser amongst the EM – Europe; Egypt outperforms

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• Among the developed markets, Hongkong, Singapore & Australia were the top gainers, up 6.0%, 4.0% & 2.9% respectively. However, the index markets were restricted due to underperformance from markets like Portugal, Austria, Germany, France & Italy, which fell by 15.8%, 11.8%, 6.4%, 6.1% and 5.4% respectively.

• Portugal fell sharply during the month of July largely on the back of worries over the financial health of a major Portuguese lender. Shares in the troubled Portuguese lender have been under pressure since May, when the bank disclosed that an audit ordered by Bank of Portugal into Espírito Santo International SA, the conglomerate that indirectly holds a stake in the bank, had found Espírito Santo International was in a "serious financial condition" and had uncovered accounting irregularities. But the declines mounted drastically after investors learned Espírito Santo International had delayed coupon payments relating to some short-term debt securities.

• Austrian stocks fell in July as entire European Markets Fell amid weak data. Austria's production index that combines industry and construction output dropped in May. Erste Group Bank AG, the Austrian lender slumped during the months to a one-year low after saying it expects a record loss this year.

• German markets underperformed after downbeat sentiment data. German business confidence fell short of expectations, weighing on German stocks as the report underscored worries that growth in Europe’s largest economy is losing steam. Germany’s business climate has recently been pressured, in part by concerns about German companies with ties to Russia, which has been hit with sanctions related to tensions with Ukraine.

• Hong Kong stocks hit their best close in more than three years in July, after a preliminary reading of Chinese manufacturing sector rose to an 18-month high, adding to signs that the economy is stabilizing. Property stocks traded higher on expectations that China will loosen its housing market policy after home prices fell in June.

• In its latest FOMC meet, the Fed Reserve continued to scale back its bond purchases, but offered no hints about when it plans to start raising interest rates. The Fed announced, as expected, that it is paring its monthly purchases by another $10 bn to $25 bn. The bond purchases have been intended to keep long-term borrowing rates low and are set to end in October. In a statement after a two-day policy meeting, the Fed reiterated its plan to keep

Hong Kong and Singapore – top gainers amongst the developed markets; Portugal, Austria & Germany underperforms

Outlook going forward

Global Market Outlook

US Interest rates could start inching up, however, timing is uncertain

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short-term rates low "for a considerable time" after its bond purchases end. Most economists think a rate increase is a year away despite a strengthening economy.

• The Fed's message, according to Jim O'Sullivan, chief U.S. economist for High Frequency Economics was that for now, the economy is making clear progress and the purchase program is being wound down but (a) tightening is still not imminent and (b) when it does start it will be gradual. However, notably, the Fed changed its views on inflation to say that it has risen closer to its percent target. The statement said that concerns that inflation would persistently run below the Fed's 2% target had "diminished somewhat." For the first time, the Fed acknowledged that inflation has moved somewhat closer to the Committee's longer-run objective. This gives a sense that rising inflation could spur the Fed to raise interest rates earlier than expected.

• While the timing of interest rate hikes is uncertain, it is very clear that the rates are going to rise sometime next year. The fear of rise in the rates earlier than expected could start to negatively impact the global markets in the near term. The increase in the interest rates in US could result in outflow of funds from the emerging markets / other developed markets, as it would become less profitable to borrow money in US and invest abroad. However, the rise in rates could somewhat benefit the US markets (atleast initially) as people would invest in the US on a signal that the US economy has turned around and that a virtuous cycle could feed itself.

• While the global markets could be impacted negatively, we don’t expect the damage to be significant. The policy makers would ensure that no hard landing might happen.

• The recent Argentine's debt default has raised doubts that it would impact the US economic growth. U.S. hedge fund managers who bought cheap Argentine debt in 2001 are now demanding the country pay interest on debt payments it defaulted on in 2001, and U.S. courts have now blocked payments to other bondholders until agreement with the “hold-outs” is reached. The Argentina situation isn’t good, but it’s not the biggest issue unnerving U.S. investors. However, we don’t expect the Argentine’s debt default to impact the US financial market, as they have very limited exposure to Argentina.

• The U.S. escalated sanctions on the Russian economy nearly two weeks after the shooting down of a civilian airliner over eastern Ukraine and amid growing violence along that country’s border with Russia. US President Barack Obama announced the new sanctions hours after the E.U. approved similar measures. US imposed new sanctions on key sectors of the Russian economy: energy, arms, and finance. The punitive measures coming into force limit access for several Russian banks to Europe's financial markets and ban some exports,

European business already feeling the heat of Ukraine crisis; continued sanctions on Russia could delay recovery in Europe

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mainly in the defence and energy sectors. Sanctions are likely to have a broad 'chilling' impact on Russia's access to external finance which will put pressure on the country's fragile balance of payments position. This in turn risks a weakening currency, higher interest rates and a negative impact on economic growth.

• Even before sanctions against Moscow start to bite, European companies doing business in Russia have been feeling the pinch and many fear worse to come. Falling consumer confidence in Russia and a drop in the ruble have also dampened business for many European companies amid the months-old crisis.

• EU is Russia’s biggest global trading partner, a net importer in a relationship dominated by oil and gas. It purchased $277 bn worth of goods from Moscow in 2013 - including $156 bn worth of crude petroleum. It is also Russia’s most important foreign investor, according to E.U. figures. Europe’s dependence on Russia, energy wise, also makes the continent vulnerable. Crude petroleum and natural gas was the biggest Russian import for 21 of the 28 E.U. member states last year. Germany alone bought $24 billion worth. The relationship isn’t all about natural resources. The E.U.’s $160 billion worth of exports to Moscow in 2013 included everything from $1.74 billion worth of Italian clothing to $53 million worth of cork from Portugal. In return, Britain consumed $44 million worth of Russian drinks.

• Of the major European countries, Germany is most exposed to the Russian risk. Russia is a major client for German electricity plants, gas turbines and agricultural machines. Machine-tool exports to Russia dropped by over 17% in the first quarter, well ahead of sanctions, and overall German exports fell by 14% in the January-to-April period. German machine-tool makers are set to miss their production growth target for this year. The sanctions now imposed on banks will potentially make it more difficult for Russian companies to access funds and invest in new machinery.

• At a time when the eurozone is still recovering from recession, the uncertainty could rapidly spread from specific sectors to the economy as a whole. The continued & strong sanctions on Russia could delay the recovery in Europe.

• The recent situation in Gaza is going out of hand and must be addressed quickly. The British public has a strong sense that the situation of the civilian population in Gaza is simply intolerable. Some 1,700 Palestinians, mostly civilians, have been killed since the conflict began more than three weeks ago. A total of 66 Israelis have died, all but two of them soldiers.

• Israel says it is defending itself from attacks by Palestinian militants and blames Hamas for civilian deaths in Gaza, saying fighters deliberately operate from civilian areas. Critics of

Gaza crisis must be addressed; could increase the geopolitical tensions & risk premium

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Israel's actions say Gaza is so densely populated any conflict there will inevitably affect civilian areas and cause civilian casualties.

• The US is clearly upset with Israel and has criticised Israel over attack on the UN facility in Rafah. However, given US's strong commitment to supporting Israel, the Obama criticism probably does not augur any substantive change in that pro-Israel US foreign policy in the near term. At present, there is no indication that the US is going to take tangible steps to punish Israel, either by limiting defense cooperation or letting through a UN Security Council resolution condemning Israel's conduct in the Gaza war. However, if the crisis worsens, we feel US could be forced to change its stance. This is because, Islamic activists may at some stage retaliate in a large way in Gulf, Africa & in other parts of the world, leading to further geopolitical tensions & increase in risk premium.

• While the union budget did not include any big bang announcement, it looked realistic & practical if one considers from medium to long term perspective. The Budget was focused on smoothening out the operational issues to speed up the business decision making process. It aims at creating a friendly business atmosphere and is focused on fiscal discipline. The budget also provided some relief to the middle class.

• Considering a very short span of time in which the Budget was prepared the FM seems to have done well to i) lay out a plan for aggressive reduction in fiscal deficit targets over the 3 years; ii) Set out plans to form new high educational and medical institutions; iii) Encourage renewable energy sector; iv) Increase income tax exemption limit, housing loan interest limit and increase deduction u/s 80C to bring more money in the hands of the consumers; v) Minimize the tinkering of direct tax provisions; vi) increase the FDI cap in defence and Insurance; vii) create a funding source for infra projects through banks and viii) provide investment allowance for small and medium businesses on capital spending is refreshing.

• However, there are certain points on which FM could have done well like i) Made more efforts to rationalize expenditure. He should have given a vision statement on how he plans to cut subsides over the next few years. This is all the more important as India's fiscal deficit in the first two months of FY15 touched 45.6% of the full-year target vs 33.3% during the comparable period in the previous fiscal year; ii) Given a clear deadline/commitment for implementation of GST/DTC; iii) Laid out a long term plan to control the burgeoning interest payments; iv) Given a statement of intent on faster/broader PSU divestment and their restructuring; v) Formed lesser committees/commissions and instead implemented

The Union budget had no big bang announcements, but was realistic & practical; speedy execution a key going forward

Indian Market Outlook

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recommendations of earlier committees; vi) Given more focus on the Banking and power sector and its current problems and how he plans to deal with them; vii) Could have announced intent to reduce dependence on foreign borrowings to avoid forex problems in future; viii) Avoid discouraging debt mutual funds as the benefit of these measures to PSU banks is not clear; ix) Explained the basis on which service tax collections are expected to rise by 31% (when there is no rise in the rates and very few new services included) and x) Highlighted concrete steps to kickstart investment cycle.

• On an overall basis, the budget was not disappointing, as it placed emphasis on driving the infrastructure growth, which is a key contributor to GDP growth. All what is needed now is the speedy execution. If the Modi-led Government is able to deliver on its promises, then we could see a meaningful turnaround in India’s growth story in the next few quarters. Driving the growth without hampering the fiscal balance would be a key challenge (fiscal deficit target of 4.1% for FY15, which FM has maintained looks tough to achieve). If the government is able to achieve this, it could be a game changer.

• While it could take a while before a full-blown recovery of the economy could be witnessed, recent data on key economic indicators are giving signal that an incipient recovery is underway. The index of industrial production (IIP) has registered positive growth over the past two months on the back of a revival in the manufacturing sector. After growing by 3.36% in the month of April, the Industrial production grew at 19-month high of 4.7% in May due to improved performance of manufacturing, mining and power sectors and higher output of capital goods. The output had contracted by 2.5% in the same month of last year. During the April-May period of the current fiscal, the IIP recorded a growth of 4%, as against contraction of 0.5% in the first two months of 2013-14.

• Further, the output of Eight Core Industries (coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity), having a combined weight of 37.90% in the Index of Industrial Production (IIP), recorded an increase of 7.3% in June 2014, highest since Sept 2013 when it recorded a growth of 8%. Also, this growth is more than three times compared to just 2.3% in May. The output has shown an increase of 4.6% for April-June 2014 compared to 3.7% growth in the earlier period. This might augur well for the IIP, which could grow at a robust rate in the month of June, since these core industries have almost 38% weight in the index.

• In addition to the recent IIP & eight core industries numbers indicating a revival in manufacturing, the HSBC's purchasing managers index (PMI), too, climbed to a 17-month high of 53 in July, signalling improvement in the business environment. The report points out that

Recent Macro economic data point towards recovery

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the companies have scaled up production in response to robust demand. The growth was driven by flood of new orders from both domestic and overseas companies. This reaffirms signals from the IIP data that seem to indicate a pick-up in export demand. Going forward, export demand is likely to be robust with the latest US GDP numbers indicating that the economy grew at four per cent on an annual basis and with the IMF (2014) also expecting global growth to rebound from the second quarter of 2014.

• The early-bird results for the first quarter of this financial year indicate that India Inc is yet to see better days. The combined net profit of 290 companies, excluding information technology (IT) exporters, has risen only 2.4% on a Y-o-Y basis, the slowest pace in nine quarters. The same set of companies had reported 3.8% annual net profit growth in Q4FY14 and 7.5% annual growth in Q1FY14. The net profit of the entire sample of 316 firms that have announced their results so far (including IT companies) was up 9% Y-o-Y in Q1FY15, compared with 10.7% growth in Q4FY14 and slightly better than 8.4% growth in the year-ago period.

• Volume growth has remained on a slow track, with revenues rising 10% (except IT), compared with 10.5% growth in Q4FY14. However, the growth was much better compared to 3.9% growth reported in Q1FY14. Further, the companies in the domestic manufacturing and services sectors (excluding IT, financial and oil & gas ones) have reported higher net sales growth of 9.5% in Q1FY15, against 5.8% in Q4FY14, which is encouraging.

• It is to be noted that the net profit growth could have been better, but was impacted due to higher depreciation charge in Q1FY15, as the Companies Act, 2013 has notified new rates for depreciation of fixed assets which have become effective from April 1, 2014. While this change has impacted the net profits of the companies, there has been no impact on their cash flows.

• While Q1FY15 results might not be impressive and Q2 could point towards only a marginal recovery, we could see a meaningful recovery in earnings cycle from H2FY15 onwards, as we expect the economic growth to start improving from H2FY15 onwards. We expect the earnings picture to stabilize in the coming one to two quarters. We don’t expect earnings downgrade this year unlike over the last three-years, wherein we have witnessed significant earnings downgrades every year. Infact speedy economic recovery could result in more upgrades rather than downgrades (though expected to happen only from FY16 onwards). We feel the consumption-driven sectors like automobiles, consumer-oriented banks, which are more sensitive to movement in economy, could do well, once the economy turns around.

Q1 earnings show India inc. yet to see better days; but higher sales growth in domestic manufacturing & services sector is encouraging

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• The month of July has revived hopes for India's agri sector with the Indian Meteorological Department (IMD) stating monsoon was 90.3 Long Period Average (LPA). IMD's August forecast also sparks hope with IMD saying the rainfall over the country as whole is likely to be 96 % of LPA during the month. There is considerable improvement witnessed in the monsoon deficit as it stands at 22% (June 1 to July 31). The deficit was 43% during the beginning phase of the month. The monsoon revival has helped central regions like Madhya Maharashtra, Vidarbha, Madhya Pradesh, Chhattisgarh and Gujarat. Regions in the northwest like Punjab, Haryana and west Uttar Pradesh failed to receive sustained rains.

• The first month of the June-September season was the driest in five years, raising fears of the first drought since 2009, when the monsoon was the weakest in nearly four decades. While monsoon has improved and reduced chances of a drought this year, it has arrived late (in mid-July) and is still below normal. August rains hold the key to India's major summer crops such as rice, soybean, cane and cotton, after a wet end to July failed to make up fully for a dry start to the monsoon season.

• If monsoon is normal this year (the probability of that happening is low), it could cool off the food inflation. This could provide more room to RBI to cut the interest rates in the monetary policy in the coming months.

• The Indian market has been witnessing strong FII buying over the last six months on expectations that the new Modi – led NDA Government would turnaround the slowing economy. The FIIs were reported net buyers to the tune of Rs. 723.4 bn over Jan-July 2014. However, it should be noted that though healthy, the FII buying has moderated over the last two months (Rs. 109 bn in June; Rs. 114 bn in July compared to Rs. 165 bn in May 2014).

• With the two major events viz; Elections & Budget already over, we feel the focus would now shift to fundamentals and execution. In the near term FII flows could moderate further on the back of global headwinds, not so impressive Q1 results so far declared from India inc and lack of major positive events on the local bourses. However, the moderation in flows could be temporary. If the government delivers on its promises and the economy picks up pace, the FII flows could pick up again and remain healthy.

• The retail participation has already increased and a turnaround in India’s growth story could result in steady increase in inflows from the retail side along with FII buying.

• The RBI, in the bi-monthly monetary policy review on August 05, 2014, kept the repo rate & reverse repo rate unchanged at 8% & 7% respectively as per the street's expectations. The

FII flows could remain healthy if the government delivers

Good improvement witnessed in monsoon deficit; August rains hold the key

RBI keeps key rates unchanged; reduces SLR by 50 bps

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Cash Reserve Ratio (CRR) was also unchanged at 4% of net demand and time liabilities (NDTL). However, the Statutory Liquidity Ratio (SLR) was reduced by 50 basis points to 22%.

• The RBI governor stated that the moderation in CPI headline inflation for two consecutive months despite the seasonal firming up of prices of fruits and vegetables since March, is due to both base effects and the steady deceleration in CPI inflation excluding food and fuel. The RBI stated that the recent fall in international crude prices, the benign outlook on global non-oil commodity prices and still-subdued corporate pricing power should all support continued disinflation, as should measures undertaken to improve food management. However, it stated that there are upside risks also in the form of the pass-through of administered price increases, continuing uncertainty over monsoon conditions and their impact on food production, possibly higher oil prices stemming from geo-political concerns and exchange rate movement, and strengthening growth in the face of continuing supply constraints. Accordingly, the upside risks to the target of ensuring CPI inflation at or below 8% by Jan 2015 remain, although overall risks are more balanced than in June. The RBI policy statement stated that RBI would continue to monitor inflation developments closely, and remains committed to the disinflationary path of taking CPI inflation to 8% by Jan 2015 and 6% by Jan 2016.

• CPI inflation stood at 43 month low at 7.3% in June 2014. Wholesale price-based inflation (WPI), too, slowed to a four-month low of 5.43% in June. However, from the policy statement of RBI (which indicated concerns of upside risks to inflation in the coming months), it appears that the central bank is unlikely to be in a hurry to ease monetary policy soon as it would keep a close tab on the progress of monsoon, exchange rate movement and the geopolitical situation. If the monsoon improves significantly in the next two months, inflation continues to moderate further, rupee remains stable & geopolitical tensions ease, then RBI could start cutting interest rates in its forthcoming monetary policies.

• The recent sharp rally in the Indian equity markets was led by huge hopes and expectations that the new BJP led NDA government would turnaround the economy quickly. There were also very high expectations from the FY15 Union Budget. Now with the two events over, the focus would shift to fundamentals & execution.

• The NDA government has a history of delivering in their previous term between 1998 and 2004. During that phase, GDP growth momentum picked up from 4% in 1997-98 to around 8% in FY05. Fiscal Deficit improved from 6.3% to 4.3%, CPI inflation fell from close to 12% to 4% and interest rates, reflected in bond yields, plunged from 12% to less than 6%.

Global headwinds, absence of positive triggers on local bourses could lead to correction in the month of August

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• Further sharp re-rating in the Indian equities from the current levels would depend on how quickly the policy reforms promised are implemented and whether they translate into revival of economic growth. India’s benchmark Sensex trades at 16-16.5x projected one-year earnings, which is at a premium to MSCI’s Emerging Markets Index, according to Bloomberg estimates. We feel that this premium is justified as with the favourable political and economic environment, the Indian economy is poised for economic recovery. Also, the economy is structurally better positioned than other emerging market economies to achieve earnings growth of companies. While the valuations are not very expensive, they are not cheap as well.

• While the medium to long term trend still remains positive, we feel the markets have run up sharply in a very short span of time. The ongoing global headwinds (Ukraine crisis, Gaza crisis, Argentina debt crisis, fear of rise in the interest rates in US earlier than expected etc) and absence of positive triggers on local bourses could result in correction in Indian equities in the month of August. We expect the BSE Sensex to trade in the range of 24800-26400 in the month of August.

Technical Commentary:

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• The above Nifty weekly line chart indicates that the index is hovering at the major supply

zone. Index has completed the major rising leg at 7842 with Expanding triangle pattern. The expanding triangle is very rare and most important pattern in technical analysis. The placement is more important for this pattern; here it appears in the internal “wave v” of the last major rising so this could lead the price downwards.

• Now price is retracing the last major rise from the low of 5933 to 7842. The golden replacement level of 38.2% & 50% levels are placed around 7100 – 6900 levels. The level also coincides with median line of the rising equi distant channel setup.

• The top of 7842 could act as very crucial resistance for bulls and extreme major hurdle for them is placed at 7930. Until the Nifty is able to breach those levels decisively it remains in a corrective phase and has a fair chance to slide down towards the above mentioned levels.

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• The above Sensex weekly OHLC chart indicates the same like Nifty. The price formations and price development makes it clear that the index is in corrective phase. It shows clearly that price has toped out at 26300 where the major rising leg has ended and now it is not into a new bullish leg. Price could correct meaningfully before it starts major fresh bullish leg.

• In case of sensex the retracement levels are placed at 23900 – 23150 levels which are 38.2% & 50% retracement level of last rising leg from 19960 to 26300.

• The formation of Expanding triangle is showed on Nifty daily chart. • The characteristics of expanding triangle: • “Wave c” has moved above the top of “wave a” • “wave d” has moved below the bottom of “wave b” • “Wave e” has moved above the top of “wave c”

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• In this formation sometimes “wave e” could test the upper line of the triangle; here it reversed before test that line, however it has moved above the “wave c” which is enough for this formation.

• The above monthly chart shows the price is trading in the deeply overbought zone which is strong bearish stance.

• RSI oscillator has turned from the high and is on the verge to slide down. • Slow stochastic is also hovering at the same over bought territory and likely to fall anytime.

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• The monthly candle stick is not encouraging for the bulls. It is a sort of reversal candle pattern.

• It is not exactly a Hammer or Doji but it suggests that it is some weak formation in the prevailing trend and also it indicates some major top has formed at 7842 levels.

• Monthly candles have high importance in technical analysis, in the past most of the candle patterns are successful .

• Last two months volumes are also less compared than the previous month.

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The month gone by:

• For the month of July, the Nifty opened at 7663; day’s low witnessed was 7,618. From there it has started moving up and made a new life time high of 7809 on July 08, 2014. On the same day itself it has started correcting and made a new lower bottom of 7742 which is low for the entire month. The bottom was made up of a bullish reversal candle and it has pushed the index to make another new life time high of 7842 on July 25, 2014. And finally on July 31, 2014 index has closed at 7721.

• Overall the month gone by was highly volatie due to some major events (Union Budget, global factors like Ukraine, Argentina, Gaza etc). The directional movement wise the full month was some 500 points move on both the sides. The month started at 7663 and ended at 7721 net to net its about 100 points gain and 500 points movements on both the side during the month.

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Learning Technical Analysis • This article introduces you to some of the basic concepts which accompany an end-to-end

quantitative trading system. It will hopefully help you to try and set up your own "retail" algorithmic trading business.

• Quantitative trading is an extremely sophisticated area of quant finance. It can take a significant amount of time to gain the necessary knowledge to construct your own trading strategies. It also requires extensive programming expertise, at the very least in a language such as MATLAB, R or Python. However as the trading frequency of the strategy increases, the technological aspects become much more relevant. Thus being familiar with C/C++ will be of paramount importance.

• Strategy Identification - Finding a strategy, exploiting an edge and deciding on trading frequency

• Strategy Backtesting - Obtaining data, analysing strategy performance and removing biases • Execution System - Linking to a brokerage, automating the trading and minimising

transaction costs • Risk Management - Optimal capital allocation, "bet size"/Kelly criterion and trading

psychology This article focuses on the first two components

• All quantitative trading processes begin with an initial period of research. This research

process encompasses finding a strategy, seeing whether the strategy fits into a portfolio of other strategies you may be running, obtaining any data necessary to test the strategy and trying to optimise the strategy for higher returns and/or lower risk. You will need to factor in your own capital requirements if running the strategy as a "retail" trader and how any transaction costs will affect the strategy.

• Contrary to popular belief it is actually quite straightforward to find profitable strategies through various public sources. Academics regularly publish theoretical trading results (albeit mostly gross of transaction costs). Quantitative finance blogs also discuss strategies in detail. Strategies employed by funds are outlined by trade journals.

• You might wonder why individuals and firms are keen to discuss their profitable strategies, especially when they know that others "crowding the trade" may stop the strategy from

Part 1 – Your Guide to Quantitative Trading

Strategy Identification

There are four major components in a quantitative trading system

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working in the long term. The reason lies in the fact that they will not often discuss the exact parameters and tuning methods that they have carried out. These optimisations are the key to turning a relatively mediocre strategy into a highly profitable one. In fact, one of the best ways to create your own unique strategies is to find similar methods and then carry out your own optimisation procedure.

Here is a small list of places to begin looking for strategy ideas: • Social Science Research Network - www.ssrn.com • arXiv Quantitative Finance - arxiv.org/archive/q-fin • Seeking Alpha - www.seekingalpha.com • Elite Trader - www.elitetrader.com • Nuclear Phynance - www.nuclearphynance.com • Quantivity - quantivity.wordpress.com Many of the strategies you will look at will fall into the categories of mean-reversion and trend-following/momentum. • A mean-reverting strategy is one that attempts to exploit the fact that a long-term mean on

a "price series" (such as the spread between two correlated assets) exists and that short term deviations from this mean will eventually revert.

• A momentum strategy attempts to exploit both investor psychology and big fund structure by "hitching a ride" on a market trend, which can gather momentum in one direction, and follow the trend until it reverses.

Another hugely important aspect of quantitative trading is the frequency of the trading strategy.

• Low frequency trading (LFT) generally refers to any strategy which holds assets longer than a trading day. Correspondingly, high frequency trading (HFT) generally refers to a strategy which holds assets intraday. Ultra-high frequency trading (UHFT) refers to strategies that hold assets on the order of seconds and milliseconds.

• As a retail practitioner HFT and UHFT are certainly possible, but only with detailed knowledge of the trading "technology stack" and order book dynamics.

• Once a strategy, or set of strategies, has been identified it now needs to be tested for profitability on historical data. That is the domain of backtesting.

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• The goal of backtesting is to provide evidence that the strategy identified via the above process is profitable when applied to both historical and out-of-sample data.

• This sets the expectation of how the strategy will perform in the "real world". However, backtesting is NOT a guarantee of success as it is the most subtle area of quantitative trading. Numerous biases, must be carefully considered and eliminated as much as possible. We will discuss the common types of bias including look-ahead bias, survivorship bias and optimisation bias (also known as "data-snooping" bias). Other areas of importance within backtesting include availability and cleanliness of historical data, factoring in realistic transaction costs and deciding upon a robust backtesting platform.

• Once a strategy has been identified, it is necessary to obtain the historical data through which to carry out testing and, perhaps, refinement. There are a significant number of data vendors across all asset classes. Their costs generally scale with the quality, depth and timeliness of the data. The traditional starting point for beginning quant traders (at least at the retail level) is to use the free data set from Yahoo Finance.

• The main concerns with historical data include accuracy/cleanliness, survivorship bias and adjustment for corporate actions such as dividends and stock splits.

• Survivorship bias is often a "feature" of free or cheap datasets. A dataset with survivorship bias means that it does not contain assets which are no longer trading. In the case of equities this means delisted/bankrupt stocks. This bias means that any stock trading strategy tested on such a dataset will likely perform better than in the "real world" as the historical "winners" have already been preselected.

• Corporate actions include "logistical" activities carried out by the company that usually cause a step-function change in the raw price, that should not be included in the calculation of returns of the price. Adjustments for dividends and stock splits are the common culprits. A process known as back adjustment is necessary to be carried out at each one of these actions.

• In order to carry out a backtest procedure it is necessary to use a software platform. You could use a dedicated backtest software, such as Tradestation, a numerical platform such as Excel or MATLAB or a full custom implementation in a programming language such as Python or C++.

• When backtesting a system one must be able to quantify how well it is performing. • The "industry standard" metrics for quantitative strategies are the maximum drawdown and

the Sharpe Ratio.

Strategy Backtesting

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• The maximum drawdown characterises the largest peak-to-trough drop in the account equity curve over a particular time period (usually annual). This is most often quoted as a percentage.

• The second measurement is the Sharpe Ratio, which is heuristically defined as the average of the excess returns divided by the standard deviation of those excess returns. Here, excess returns refers to the return of the strategy above a pre-determined benchmark, such as the S&P500 or a 3-month Treasury Bill. Note that annualised return is not a measure usually utilised, as it does not take into account the volatility of the strategy (unlike the Sharpe Ratio).

• Once a strategy has been backtested and is deemed to be free of biases (in as much as that is possible!), and has a healthy Sharpe ratio and minimised drawdowns, it is time to build an execution system.

Derivatives Commentary:

• The month of July 2014 saw the Nifty witnessing a roller coaster ride although it remained

within a narrow range of 7400-7820. M-o-M, the Nifty gained 1.45%. • In the F&O space, the FIIs were net sellers in the Index Futures segment of Rs.322 cr (vs net

sellers of Rs.2061 cr in Jun 2014). Along with the fall in the open interest, it indicates

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unwinding of long positions built earlier in index futures segment. In the index Options segment, the FIIs were net buyers of Rs.3575 cr (vs net buyers of Rs.9389 cr in Jun 2014), which was accompanied with a minor fall in open interest. In the Stock Futures segment, FIIs were large net buyers, while open interest fell over Jun.

• The Aug 2014 series has started on a lighter note compared to the previous series. In terms of value, the Aug 2014 series has begun with market wide OI at Rs.64,100 crs. Vs. Rs.69,200 crs. at the beginning of the July 2014 series. It was Rs.67,700 crs. at the beginning of the June 2014 series. This decrease in OI indicates that traders have become less aggressive and have therefore decreased their participation.

• Looking at the rollover data, we observe that rollover figures were higher implying that traders carried forward their bullish bets into the Aug series on expectations the market could rebound once again after the recent weakness.

• While Nifty rollover was at 68% as against the three month average of 63%, Market wide rollover was at 78% Vs. the three month average of 74%.

• Sectorally, IT and Pharma stocks saw the most rollovers as investors have turned positive on exporters after the US economy grew 4% in second quarter. Capital Goods and PSU Banks have seen low rollovers after stocks saw a sharp run up over past few months.

• Reflecting the declining volatility expectations, the Nifty IV has dipped to 14.56% at the start of the Aug series from 16.93% at the beginning of the July series. The Nifty OI PCR gave bullish signals as it climbed to 0.8 at the start of the Aug series from 0.74 at the start of the July series. The rise in the OI PCR indicates a greater buildup of puts in the market.

• Technically, the Nifty is now in a short term downtrend after breaking its recent lows of 7707. Further downsides are likely once the immediate supports of 7593 are broken.

• Index option activity is suggesting a wide trading range of 7300-8000 in the near term. This is because the maximum Call OI is currently being seen in the 8000 strikes indicating this is the maximum expected upside for the Nifty in the near term. In the put segment, maximum OI is currently being seen in the 7300 puts, suggesting this is the maximum risk on the downside for the near term.

• An investor purchasing a put while at the same time purchasing an equivalent number of

shares of the underlying stock is establishing a married put position – a hedging strategy

Learning Derivatives Analysis

Married Put

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• Bullish to very bullish. When to deploy?

• The investor employing the married put strategy wants the benefits of stock ownership (dividends, voting rights, etc.), but has concerns about unknown, near-term, downside market risks. Purchasing puts with the purchase of shares is a bullish strategy with hedging or protecting downside risk. The primary motivation of this investor is to protect his shares of the underlying security from a decrease in market price. Investor will purchase equivalent numbers of puts while purchasing the shares. Help of Hedging?

• While the married put investor retains all benefits of stock ownership, he has hedged his shares against an unacceptable decrease in value during the lifetime of the put, and has limited, predefined, downside market risk. If there is a sudden, significant decrease in the market price of the underlying stock, a put holder may enjoy rise in IV’s with a rise in time value of the stocks. Alternatively, a previously entered stop loss limit order on the purchased shares might be triggered at a time and at a price unacceptable to the investor. The put contract has conveyed to him a guaranteed selling price, and control over when and/or if he chooses to sell his stock. Risk vs. Reward?

• Maximum Profit: Unlimited

Market VIEW?

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• Maximum Loss: Limited Stock Purchase Price – Strike Price + Premium Paid Upside Profit at Expiration:

• Gains in Underlying Share Value – Premium Paid • Maximum profit depends only on the potential price increase of the underlying stock; in

theory it is unlimited. When the put expires, if the underlying stock closes at the price originally paid for the shares, the investor’s loss would be the entire premium paid for the put. Break-Even Point (BEP) at Expiration?

• BEP: Stock Purchase Price + Premium Paid Volatility?

• If Volatility Increases: Positive Effect • If Volatility Decreases: Negative Effect • Any effect of volatility on the option’s total premium is on the time value portion.

Time Decay? Passage of Time: Negative Effect

• The time value portion of an option’s premium, which the option holder “purchased” when paying for the option, generally decreases, or decays, with the passage of time. This decrease accelerates as the option contract approaches expiration. Alternatives before Expiration?

• The investor employing the married put is free to sell his stock as well as sell his long put. For instance, if the investor loses concern over a possible decline in market value of his hedged underlying shares, the put option may be sold if it has market value remaining. Alternatives at Expiration?

• If the put option expires out-of-the-money and with no value, no action need be taken; the investor will retain his shares. If the option expires in-the-money, the investor can cash in with rise in Put price & by selling his shares in the market at no loss or premium paid by the investor while purchasing the Put.

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Example • An options trader is very bullish on XYZ stock but worried about near term uncertainties. He

establishes a married put position by purchasing shares of XYZ stock trading at Rs.52 in June while simultaneously buying SEP 50 put options trading at Rs.2 to protect his share purchase.

• Maximum loss occurs when the stock price dive to Rs.50 or below at expiration. With the SEP 50 puts in place, even if the stock price fall to Rs.30, he will still be able to sell his holdings for Rs.50. Therefore, his maximum loss is limited Rs.2 in paper loss + Rs.2 in premium paid for the options = Rs.4.

• On the upside, there is no limit to the profits should the stock price head north. Suppose the stock price goes up to Rs.70, his profit will be Rs.18 in paper gain less Rs.2 paid for the put protection = Rs.16.

• However, if the stock prices remain unchanged at expiration, he will still lose Rs.2 in premiums paid for the put insurance.

Extract of Calls during July 2014 Index Futures Calls

Date B/S Trading Call Entry at Sloss Targets Exit Price /

CMP Exit Date %

G/L Comments Time

Horizon Avg.

Entry Abs.

Gain/Loss

23-Jul-14 S Nifty Future 7764.35 7810 7710 7810.0 24-Jul-14 -0.6 Stop Loss Triggered 2-3 days 7764.35 -45.65

16-Jul-14 S Nifty July Fut. 7570 7610 7440 7610.0 16-Jul-14 -0.5 Stop Loss Triggered 1-5 Days 7570 -40

15-Jul-14 B Nifty July Fut. 7473 7440 7560 7512.0 15-Jul-14 0.5 Premature Profit Booked 1-3 Days 7473 39

11-Jul-14 B Nifty Future 7493.65 7485 7625 7493.9 11-Jul-14 -0.7 Stop Loss Triggered 2-3 days 7544.65 -50.8

3-Jul-14 S Nifty July Fut 7751 7790 7650 7704.0 4-Jul-14 0.6 Premature Profit Booked 1-5 Days 7751 47

Stock and Nifty Options Calls

Date B/S Trading Call Entry at Sloss Targets Exit Price / CMP

Exit Date % G/L

Comments Time Horizon

Avg. Entry

Abs. Gain/Loss

28-Jul-14 B SBIN 2460 Put 11.7 7.9 22 7.9 30-Jul-14 -32.5 Stop Loss Triggered 1-3 Days 11.7 -3.8

30-Jul-14 B Crompgreaves 190 Call 2.5 1.45 4 4.0 30-Jul-14 60.0 Premature Profit Booked 2-3 days 2.5 1.5

28-Jul-14 B HCL TECH 1650 Call 8 5.5 18 11.4 28-Jul-14 42.5 Premature Profit Booked 1-3 Days 8 3.4

25-Jul-14 B HUL 650 Call 9 6 15 13.1 25-Jul-14 45.0 Premature Profit Booked 1-3 Days 9 4.05

17-Jul-14 B Rcom July 130 Calls 5.55 3.7 11 3.7 18-Jul-14 -33.3 Stop Loss Triggered 1-5 days 5.55 -1.85

17-Jul-14 B SSLT 305 Call 7 5 14 9.5 17-Jul-14 35.7 Premature Profit Booked 1-5 Days 7 2.5

11-Jul-14 B Tata Motors call 450 12.7 7 35 16.8 14-Jul-14 32.3 Premature Profit Booked 5-days 12.7 4.1

2-Jul-14 B Reliance 1040 Call Option 30.8 23.4 50 23.4 3-Jul-14 -24.0 Stop Loss Triggered 1-3 Days 30.8 -7.4

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1-Jul-14 B Tata Steel July 540 Call Option 19.25 13.5 35 22.6 1-Jul-14 17.1 Premature Profit Booked 1-7 days 19.25 3.3 Update of Trading BTST / STBT/ Future Calls

Date B/S Trading Call Entry at Sloss Targets Exit Price /

CMP Exit Date %

G/L Comments Time

Horizon Avg.

Entry Abs.

Gain/Loss

31-Jul-14 B Kitex 245, 257.4 240 280 268.0 31-Jul-14 4.1 Premature Profit Booked 2-3 days 257.4 10.6

25-Jul-14 B Petronet 184.2 178 197 188.1 28-Jul-14 2.1 Premature Profit Booked 1-5 days 184.2 3.85

25-Jul-14 S Short IOB Fut 70.7 73 66 68.9 25-Jul-14 2.6 Premature Profit Booked 1-5 days 70.7 1.8

17-Jul-14 B Cairn Fut 347.85 342 367 342.0 23-Jul-14 -1.7 Stop Loss Triggered 7-days 347.85 -5.85

18-Jul-14 B Cummins 673.2 640 750 655.8 22-Jul-14 -2.6 Exit Called 1-5 days 673.2 -17.45

21-Jul-14 B GT Offshore 112.9 107 130 122.8 21-Jul-14 8.7 Premature Profit Booked 1-5 days 112.9 9.85

18-Jul-14 B Geometric 147.6 143 160 152.9 18-Jul-14 3.6 Premature Profit Booked 2-3 days 147.6 5.25

17-Jul-14 B Pratibha 56, 59.5 54 68 62.1 17-Jul-14 4.4 Premature Profit Booked 2-3 days 59.5 2.6

16-Jul-14 S Axis Bank Jul Fut. 1940 1980 1750 1980.0 16-Jul-14 -2.0 Stop Loss Triggered 3-10 Days 1940 -40

14-Jul-14 B Bank of India 264.55 256 282.5 272.0 14-Jul-14 2.8 Premature Profit Booked 2-3 days 264.55 7.45

10-Jul-14 B Tata Steel 534.3 511 580 522.9 10-Jul-14 -2.1 Exit Called 1-5 days 534.3 -11.4

4-Jul-14 B Mirza Int 37.25 34.95 41.5 39.1 7-Jul-14 5.0 Premature Profit Booked 2-3 days 37.25 1.85

2-Jul-14 B Aries 85.05 81 96 90.4 3-Jul-14 6.3 Premature Profit Booked 2-3 days 85.05 5.35

1-Jul-14 B Heliosmath 91.5 87 100 94.5 2-Jul-14 3.3 Premature Profit Booked 2-3 days 91.5 3 Positional Calls

Date B/S Trading Call Entry at Sloss Targets Exit Price /

CMP Exit Date %

G/L Comments Time

Horizon Avg.

Entry Abs.

Gain/Loss

17-Jul-14 B MHRIL 305-312.7 292 365 295.2 30-Jul-14 -5.6 Exit Called 5-10 days 312.7 -17.5

17-Jul-14 B Axis IT 96, 100 94 130 110.9 17-Jul-14 10.9 Premature Profit Booked 5-7 days 100 10.9

7-Jul-14 B JBF Ind 133.55, 140.55 131 160 131.0 9-Jul-14 -4.4 Stop Loss Triggered 5-7 days 137.05 -6.05

3-Jul-14 B Goa Carbon 92, 96.2 89 115 109.2 7-Jul-14 13.5 Premature Profit Booked 5-7 days 96.2 13

1-Jul-14 B Zuari 176, 183.65 173 196 196.0 7-Jul-14 6.7 Target Achieved 5-7 days 183.65 12.35

27-Jun-14 B ROLTA 109.5 104.5 125 113.4 2-Jul-14 3.5 Premature Profit Booked 2 Weeks 109.5 3.85

30-Jun-14 B DCW 24.5, 26.55 23.5 30 28.8 2-Jul-14 8.5 Premature Profit Booked 5-7 days 26.55 2.25

27-Jun-14 B IGL Fut 354.3 345 375 375.0 1-Jul-14 5.8 Target Achieved 7-days 354.3 20.7

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Gainers & Losers – July 2014

RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate OfficeHDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Website: www.hdfcsec.com Email: [email protected] Disclaimer: This document has been prepared by HDFC securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for non-Institutional Clients only.

Price Price % chg 30-Jun-14 31-Jul-14

IDEA 132.45 156.85 18.42

HINDALCO 164.20 191.70 16.75

GLENMARK 570.10 659.30 15.65

BHARATFORG 626.00 723.75 15.62

SUNPHARMA 687.95 790.95 14.97

JUSTDIAL 1461.75 1672.60 14.42

EXIDEIND 145.00 164.45 13.41

LUPIN 1048.05 1181.75 12.76

IDFC 135.10 152.25 12.69

IRB 229.50 257.55 12.22

Price Price % chg 30-Jun-14 31-Jul-14

UNITECH 33.75 25.45 -24.59

JPASSOCIAT 77.20 58.45 -24.29

GMRINFRA 34.45 26.75 -22.35

IBREALEST 99.90 78.65 -21.27

JPPOWER 23.95 18.95 -20.88

UNIONBANK 240.85 191.25 -20.59

ANDHRABANK 103.00 82.30 -20.10

IDBI 109.45 89.15 -18.55

SYNDIBANK 175.25 143.65 -18.03

M&MFIN 282.05 235.25 -16.59

Price Price % chg 30-Jun-14 31-Jul-14

BBTC 146.75 215.00 46.51

WELSPUNIND 175.10 238.55 36.24

TATASPONGE 654.40 887.85 35.67

NBCC 346.20 464.75 34.24

ATUL 890.55 1192.75 33.93

FINANTECH 252.65 319.80 26.58

COX&KINGS 212.55 265.00 24.68

GPPL 117.05 145.85 24.60

ASAHIINDIA 72.40 89.45 23.55

SBBJ 549.10 663.85 20.90

Price Price % chg 30-Jun-14 31-Jul-14

SHRENUJ 125.00 60.85 -51.32

REIAGROLTD 5.75 3.50 -39.13

GTLINFRA 3.75 2.65 -29.33

ORBITCORP 25.50 18.20 -28.63

HUBTOWN 176.30 128.25 -27.25

TBZ 209.00 155.30 -25.69

GVKPIL 19.15 14.25 -25.59

OPTOCIRCUI 39.50 29.45 -25.44

LAKSHVILAS 111.25 83.25 -25.17

UNITECH 33.75 25.45 -24.59

Top Gainers From F&O Top Losers From F&O Top Gainers From CNX 500 Top Losers From CNX 500