Silent but significant Diwali!
The Supreme Court ban on loud and polluting Diwali crackers to curb noise levels could not have come at a better time. The India economy is undergoing a tough push-and-pull situation and the sentiment at Dalal Street, too, lacks the festive fervor. The weak market sentiment given the liquidity crisis in the realty and NBFC space and with mid-caps and smallcaps erasing all the gains of the last couple of years has wrecked the confidence of investors. Diwali this year may see some last minute festive shopping but for investors to wear a festive smile at ‘Muhurat’ Trading is unlikely. The gains witnessed on the bourses last week were expected.
The Sensex and Nifty have lost to a limited extent thanks to a handful of several weighted large-caps. Fine-tuning by the large-caps prevented the key indices from recording a fall beyond 15% whereas in reality the Sensex could be around the 20000 level given the sharp fall in broader markets. Last week’s rally can be safely termed as a momentary relief to investors, leading to a ‘Silent Diwali’.
The spat between the RBI and the Finance Ministry is no mean a worry. Deputy Governor, Vishal Acharya’s, speech last week made a text book case for the central bank’s autonomy. The issue emerged when fingers were pointed at the RBI for its failure to monitor the rising NPAs (non-performing assets) and failure to adopt stricter payments and settlement systems. The major source of friction is the government’s commercial dominance of the financial sector through banking and insurance channels since it is allergic to a neutral regulatory regime. The only way to manage this situation is to have more robust arrangements to overcome the differences.
The RBI has put 11 public sector banks (PSBs) accounting for 18.5% advances in March 2018 under lending restraints on account of their high level of bad loans leading to differences with the government. This hampers lending. But as long as the RBI cannot deal with PSBs as it did with Yes Bank, it is difficult to fault its conservatism especially after its last attempt at diluting bad loan recognition norms in 2008-09, which led to disastrous consequences. Last but not the least, independent institutions are valued and all democracies rely on them. Little wonder, President Trump is screaming at the US Federal while ex-President Obama held Alan Greenspan responsible for Hillary Clinton’s defeat. Sacking Urjit Patel or provoking him to resign or curbing RBI’s autonomy may trigger a mass exodus of investors. The slide that will ensue thereafter will make the economy’s current travails look like a picnic! The government should not contemplate it even in its dreams.
Coming back to the markets, it is customary to identify some ‘Muhurat Picks’ with Diwali around. With the current situation being so fluid and with most mid-caps and small-caps at their multi-year lows, investors should focus on growth-oriented and dividend-paying companies. It may be prudent to buy select stocks from sectors like infrastructure, metals, pharmaceuticals,
I.T. and auto. The correction in small-caps and mid-caps may be nearing completion but time-wise, correction is still distant away. Large-caps remain a favorite because of their immunity to trigger a big fall. Therefore, investors are advised to make token purchases of select mid-caps and small-caps along with a handful of large-caps. Do not buy stocks that display high momentum and operator interest either upside or downside. Continue your existing SIPs. In fact, it may be prudent to accumulate select schemes in the current scenario. It may also be prudent to shift a portion of your portfolio to debts to take advantage of higher interest rate returns. Going forward, two factors will decide the course of the market – (i) crude oil prices; and (ii) outcome of election polls. If crude oil prices rise to $100/barrel, it becomes very difficult to navigate the Indian economy. Politically, the market is already factoring in a weaker BJP-led NDA coming to power. With NaMo’s wings clipped, the reform agenda may slow down but clean governance will persist. If a weaker ‘Mahagathbandhan’ of radically different ideologies comes to power, the country will go through a lull and reversal of progressive moves with the markets reaching abysmal lows. It is a tight ropewalk for investors this Diwali to next. Hence, let the norms of safe navigation rule every step of yours. May prudence guide us this Diwali. Happy investing!
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