EQ­UITY MAR­KET & LIQ­UID­ITY: TALES OF WOE GUEST COL­UMN

Financial Chronicle - - DEEP - SHACHINDRA NATH Ex­ec­u­tive CMD, Ugro Cap­i­tal

ON Wed­nes­day, the bench­mark Dow Jones In­dus­trial Aver­age fell by over 800 points in its worst ever drop since Fe­bru­ary trig­gered by a rout in front­line tech­nol­ogy stocks. While the jury is still out on what drove the Wall Street to record lows, a con­sen­sus view that is emerg­ing amid the grow­ing un­cer­tainty is that it is the hard­en­ing in­ter­est rates in the US, es­ca­lat­ing trade ten­sions and boil­ing oil prices to­gether that have turned the tide against eq­ui­ties at a global scale.

Back home, the theme that has been play­ing out in the eq­uity mar­ket is sell, sell and sell mir­ror­ing the grow­ing woes of global mar­kets. The jit­ters in the US mar­ket have ripped through the In­dian mar­ket on Thurs­day with the bench­mark in­dex – the 30-share

S&P BSE Sensex tank­ing by an­other 759.74 points or as much as 2.19 per cent to close at 34,001.15, dash­ing all the hopes of any re­cov­ery. Sim­i­larly, the re­newed wave of sell off shaved off 225.45 points or 2.16 per cent from the broader barom­e­ter Nifty 50 to close trad­ing at 10,234.65

Nul­li­fied ac­tions

The broad based sell off in the do­mes­tic eq­uity mar­ket has nul­li­fied what­ever ac­tions that the gov­ern­ment, the RBI and other in­sti­tu­tions have been tak­ing to steady the sink­ing mar­ket. In­ter­est­ingly, the cur­rent spate of sell-offs came on the back of RBI’s de­ci­sion to open the liq­uid­ity tap for NBFCs, with state-owned len­der SBI and the Na­tional Hous­ing Bank (NHB), in toe, by buy­ing (or in the case of the NHB, re­fi­nanc­ing) loans from NBFCs and HFCs. This con­certed move to pump in liq­uid­ity into the sys­tem did not brighten sen­ti­ments as the do­mes­tic mar­kets seem to be tak­ing cues from their global peers, more specif­i­cally from Wall Street.

This volatil­ity in the eq­uity mar­ket has been the most prom­i­nent in the fi­nan­cial sec­tor in In­dia, specif­i­cally among NBFC and Hous­ing Fi­nance stocks. Most in­vestors take their cue from eq­uity mar­kets; given the high ex­po­sure of the mu­tual fund in­dus­try to the NBFC seg­ment, there is in­creas­ing risk aver­sion among in­vestors, which in turn has re­sulted in pres­sure on fund man­agers to ei­ther re­duce their ex­po­sure to the NBFC and HFC seg­ments or at least not pro­vide fur­ther liq­uid­ity to these seg­ments.

The NBFC and HFC sec­tor has thus en­tered a vi­cious cy­cle – the fears of a liq­uid­ity cri­sis in these com­pa­nies has re­sulted in a sell off, which in turn has re­sulted in liq­uid­ity providers turn­ing the taps off on fur­ther liq­uid­ity.

Both, the broader mar­kets, which con­tinue to be weak be­cause of global fac­tors, and the NBFC and HFC seg­ments, which are reel­ing un­der the ef­fects of the per­ceived liq­uid­ity cri­sis re­quire in­vestors to tread a cau­tious path. At times, ev­ery cor­rec­tion in the mar­ket or hard­en­ing of yields looks very at­trac­tive, and seems to be the right time to in­vest – how­ever, un­less you are a seasoned in­vestor who can make a qual­i­fied de­ci­sion ca­pa­ble of drown­ing out the noise in the mar­kets, it is ad­vis­able to trade with cau­tion – los­ing some up­side is bet­ter than los­ing your prin­ci­pal in this mar­ket.

How­ever, if you are hold­ing an in­vest­ment, it is ad­vis­able to wait. If you are hold­ing an in­vest­ment in a mu­tual fund, then you can dis­cuss this with your ad­vi­sor and draw com­fort on their port­fo­lio be­fore you take a hasty de­ci­sion to re­deem. Re­mem­ber, a de­ci­sion to exit, driven by fear will in­crease the pain for the broader mar­ket. The sage ad­vice, there­fore, is to tread with ex­tremely cau­tion in a volatile mar­ket with no sup­port in sight till global mar­kets stead­ies.

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