In­vestors Should Avoid Tak­ing Fresh Po­si­tions As Mar­ket Turns Bear­ish

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Bears con­tin­ued to rule the stock mar­ket and erode in­vestors wealth as the BSE Sen­sex plunged nearly 1030 points since last Fri­day. With this re­cent fall, In­dia has lost its place in the USD 2 tril­lion mar­ket cap club. Over the last week, In­dian ru­pee con­tin­ued to de­pre­ci­ate against the US dol­lar as it breached the mark of 73 to a dol­lar for the first time ever. This weak­en­ing of ru­pee trig­gered a mas­sive sell-off by the FIIs to pro­tect their port­fo­lios from cur­rency losses. How­ever, this was not the end of in­vestors’ pain as the crude oils' north­ward march added fur­ther woes to in­vestors’ sen­ti­ments. The US sanc­tions on Iran led to dis­rup­tion on the sup­ply side, which is tak­ing crude oil to new highs, and on Wed­nes­day, Brent crude oil prices hit the mark of USD 85 per bar­rel, which was last seen in Novem­ber 2014. Com­ing to the do­mes­tic is­sues, the de­fault by IL&FS has ren­dered the in­vestors sen­ti­ments frag­ile. Be­sides, the 10-year In­dian bond yield is on an up­surge, and on Wed­nes­day, it broke the level of 8 per cent, which was not seen since last four years.

Dur­ing the week, the auto mak­ers came up with sales num­ber for the month of Septem­ber. The num­bers came in mixed as against street es­ti­mates and the dis­mal sales num­bers could be at­trib­uted to Ker­ala floods and de­layed fes­tive sea­sons. In the car seg­ment, mar­ket leader Maruti posted dis­mal per­for­mance with flat do­mes­tic vol­umes for Septem­ber month. On the two-wheeler front, TVS Mo­tor posted healthy growth of 17 per cent YoY for the month. Amid ris­ing ve­hi­cle own­er­ship cost due to in­creas­ing in­ter­est rate, price hike by auto mak­ers and higher fuel prices, auto mak­ers are likely to face chal­lenge to ac­cel­er­ate sales num­bers in the near term. Fur­ther, the re­cent manda­tory long term in­sur­ance is likely to act as a speed breaker in the path of auto sales growth.

On Wed­nes­day, the RBI’s mone­tary pol­icy com­mit­tee started its bi-monthly dis­cus­sions to de­cide the key pol­icy rates. RBI has al­ready raised in­ter­est rates two times in a row. This time also, the mar­ket par­tic­i­pants are ex­pect­ing rate hike due to in­creased oil prices, weak­en­ing of do­mes­tic cur­rency and anx­i­ety on liq­uid­ity. At the same time, in­creas­ing in­ter­est rate in the United States along with the strength­en­ing dol­lar are re­sult­ing in cap­i­tal out­flow from de­vel­op­ing na­tions and widen­ing of the cur­rent ac­count deficit are likely to make the RBI go for rate hike for the third time in a row. If RBI goes for rate hike on Fri­day, then it would make In­dia at­trac­tive for for­eign in­vestors as it will re­sult in higher yield on debt. The rate hike would also ease in­fla­tion­ary pres­sures aris­ing due to ris­ing oil prices.

More­over, on Thurs­day the Gov­ern­ment of In­dia cut ex­cise duty on petrol and diesel by Rs 1.50, while the oil mar­ket­ing com­pa­nies (OMCs) will ab­sorb Re. 1 cut. These moves from the gov­ern­ment came amid ris­ing oil prices and weak­en­ing ru­pee, which con­tinue to over­hang on gov­ern­ment’s cur­rent ac­count deficit tar­get. This move would lead to ad­verse im­pact on OMC’s prof­itabil­ity.

On the val­u­a­tion front, despite re­cent cor­rec­tion, the Nifty’s P/E mul­ti­ple stands at 26.3x on Wed­nes­day’s clos­ing ba­sis. This val­u­a­tion is still out of the com­fort zone as it is far higher than the av­er­age P/E level of 20.9x. Thus, we con­tinue to main­tain our stance and sug­gest our in­vestors to stay put with­out try­ing to av­er­age any of the stocks in their port­fo­lios and re­frain from buy­ing on dips any new ones.

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