Global stock mar­ket cor­rec­tion putting pres­sure on do­mes­tic front too

Financial Chronicle - - DIVE - SAR­A­VANA KU­MAR Chief In­vest­ment Of­fi­cer LIC Mu­tual Fund

NIFTY in­dex, con­sid­ered as a broader eq­uity mar­ket in­dex, has cor­rected ap­prox­i­mate 13 per cent since Au­gust 28, 2018. Mar­ket has cor­rected due to var­i­ous fac­tors. Global stock mar­ket cor­rec­tion is putting pres­sure on In­dian mar­ket too. If we an­layse, US FOMC (Fed­eral Open Mar­ket Com­mit­tee) has kept in­creas­ing the Fed rate mul­ti­ple times in the last 18 months. The 10-year US trea­sury that was trad­ing sub 2 per cent two years ago is cur­rently trad­ing at 3.2 per cent. On risk ad­justed ba­sis, the US trea­sury yield looks at­trac­tive for in­sti­tu­tional in­vestors of de­vel­oped mar­kets as well as emerg­ing mar­kets. In­dia also wit­nessed a Rs 48,000 crore for­eign port­fo­lio in­vest­ment out­flow to the US mar­ket.

In ad­di­tion, eq­uity mar­ket has cor­rected due to other im­por­tant fac­tors like in­crease in crude oil price, de­pre­ci­a­tion in ru­pee, credit de­fault of IL&FS and its group com­pa­nies, pos­si­ble ALM mis­match in NBFC sec­tor and elec­tions.

Brent crude which was trad­ing at $45 per bar­rel in June 2017, touched $86 per bar­rel in the first week of Oc­to­ber. Since In­dia im­ports 85 per cent of crude oil, our coun­try’s CAD as well as fis­cal deficit are more sen­si­tive to global crude oil price move­ment. Ev­ery $10 in­crease in crude will put a pres­sure of 40 bps in In­dia’s re­tail in­fla­tion.

Ru­pee which was trad­ing at 63 to dol­lar in Jan­uary 2018 touched 74.4 in the first week of Oc­to­ber. That is equiv­a­lent to 18 per cent de­pre­ci­a­tion. RBI had pumped more than $21 bil­lion in the cur­rency mar­ket to strengthen the ru­pee. Cur­rency de­pre­ci­a­tion is putting pres­sure on the im­port sen­si­tive sec­tors like in­dus­trial commodities, elec­tron­ics & dig­i­tal in­stru­ments im­ports, etc.

In the last 6 weeks we have seen ma­jor tur­moil in the NBFC sec­tor due to IL&FS cri­sis. IL&FS de­fault has led to ma­jor re­demp­tion in the liq­uid, credit fund, short term funds, etc of var­i­ous mu­tual funds. Eq­uity shares of NBFCs cor­rected due to con­cerns on tighter liq­uid­ity, likely as­set li­a­bil­ity man­age­ment chal­lenges in the NBFCs etc. Fur­ther, RBI said that it would tighten the rules of NBFC. It is ex­pected that the NBFC, in­clud­ing HFC’s, growth rate would slow down due to the above de­vel­op­ments.

Five ma­jor state elec­tions are due be­fore De­cem­ber 2018. Ad­verse elec­tion re­sults will create trou­ble for the NDA gov­ern­ment and in turn im­pact the 2019 gen­eral elec­tion out­come. In­sta­bil­ity in the Cen­tral gov­ern­ment will af­fect the eco­nomic re­forms, em­ploy­ment rate, in­fra­struc­ture growth, pos­si­ble in­flow from for­eign port­fo­lio in­vest­ments as well as for­eign direct in­vest­ments.

Mean­while, in­sti­tu­tional in­vestors will be closely watch­ing on quar­terly fi­nan­cial re­sults that will be out by now and tak­ing calls on the fu­ture mar­ket di­rec­tion. It is ex­pected that since eq­uity mar­ket has cor­rected at a good per­cent­age, se­lec­tive in­dus­trial sec­tors might re­cover soon. We are an­tic­i­pat­ing the ru­ral theme to con­tinue do­ing well. Ex­pect­ing cur­rency de­pre­ci­a­tion, we think ex­port-ori­ented sec­tors like phar­ma­ceu­ti­cals, in­for­ma­tion tech­nol­ogy and agro chem­i­cals will do well. Se­lec­tive auto OEMs & auto an­cil­lar­ies, FMCG too will do well.

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