CORRECTION CANNOT BE RULED OUT
On 10 September 2018, I had advised investors to remain cautious when the Nifty was trading high at the 11589 level. After the Nifty touched its earlier bottom of 10316 on 5 October 2018, most analysts turned bullish when a pullback rally up to 10460 was witnessed. However, I maintained my stance in my next article titled ‘More pain ahead’ on 8 October 2018. The markets had fallen sharply to 10030 since then before pulling back to close at 10553 on Friday, 2 November 2018.
This makes one thing certain – Stock market is a valuation game. When valuations get unrealistic, negatively or positively, macros and micros act as a trigger to bring them to rational levels. This is what is happening right now. The earnings season has been a mixed bag so far. While Reliance Industries, Hindustan Unilever, Maruti Suzuki India, HDFC Bank, Bajaj Finance and ITC posted encouraging results, Yes Bank, Asian Paints, ACC and Bajaj Finserv disappointed the street. Many mid-caps such as Lakshmi Machine Works, Lakshmi Vilas Bank, Mahindra & Mahindra Financial Services, Larsen & Toubro Finance Holding, HDFC Asset Management Company, Monsanto India, Union Bank of India, Tata Power Company, Vijaya Bank, 3M India, Prestige Estates Projects, Ramco Cements, Premier Explosives, Torrent Power, etc. have already announced their results while many are slated to announce them next week. The market trend for mid-caps depends on the rest of the earnings season. A positive outlook/ guidance from some mid-caps could boost the market sentiment. If that happens, mid-caps may outperform the broader markets in the next few days.
The NBFC saga due to the IL&FS fiasco is not over but the markets have punished the entire sector badly. Liquidity tightening in the system will push the borrowing cost for NBFCs. The liquidity crunch fear hovers over the market and any negative news on this front will lead to another beating of NBFC stocks. According to Bloomberg Economics India Banking Liquidity Index, last month’s liquidity crunch is estimated at ~Rs.1.4 lakh crore as opposed to a surplus of Rs.58000 crore in September 2018. The Nikkei PMI Composite Output index fell to 51.9 in August from a 21-month high of 54.1 in July, owing to weaker growth in both the manufacturing and service sectors. This is a vicious circle where NBFCs will have issues in lending to retail consumers because of which consumer demand will slow down. In turn, NBFCs will not be able to lend more and cannot earn from demand growth. The RBI was quick to take the following steps to ease liquidity: 1. Banks can use government securities as Level-1 high quality liquidity assets (HQLA) equivalent to their respective incremental lending to NBFCs and HFCs after 19 October 2018. This will ease the mandatory liquidity coverage ratio (LCR) requirements for banks, which in turn will infuse more liquidity in the markets. 2. The capital fund lending limit for banks to a single non-infra NBFC has been hiked to 15% from 10% earlier. This will resolve issues mainly for HFCs or NBFCs that don’t lend to infra projects to a large extent. These incentives for banks are valid only till December 2018 as the central bank expects the liquidity issue to settle by then. While these steps are encouraging, they are not enough to ease liquidity in the system. However, the market reaction to
NBFCs seems exaggerated. The market always takes a futuristic approach and often behaves more out of fear than reality. While liquidity crunch is a reality today, the RBI and the central government have assured that requisite measures will be taken to ease liquidity in the system. If the government does not address issues related to the financial system sustenance on a priority basis, it will have a wider impact in the global scenario. I’m sure the central bank will continue to take necessary steps to ease liquidity and will manage the situation eventually. Hence, contrary to market fears, I see the current situation as a golden opportunity for long-term investors to enter some quality NBFC stocks. On the valuation front, the markets are now in a much better shape. However, a further correction is not ruled out although I don’t expect the fall to be as steep as earlier. Currently, the Nifty trades at a P/E of 25.4x, down from 26.95x on 5 October 2018 and 28.17x on 7 September 2018. Its P/BV ratio stands at 3.35 v/s 3.28 on 5 October and 3.73 on 7 September 2018. The EPS works out to
415.47. Although the valuations
have cooled off a bit, they are still not in a very comfortable range.
The markets are likely to remain volatile in the next few months. In my view, the markets will consolidate between 9500 and 10500 for a few months before rising further. Many events are lined up on the domestic front, which investors will watch closely. State elections followed by general elections next year being the biggest event. While maintaining Rajasthan is a big challenge for the ruling NDA, other state election results will also be watched keenly. Any other state lost by the BJP will be bad for the markets as they will then start anticipating the general election outcome on similar lines. But if BJP wins Rajasthan, it may reverse the market mood altogether. Political stability at the Centre is extremely important for the markets to move higher. The markets will remain volatile ahead of the general elections next year. In short, the markets may correct further and consolidate over the next few months. The valuations have not yet reached the bottom and hence a further downside cannot be ruled out. A good earnings season coupled with favorable state election results may change the mood. However, global events, unfavorable state election results, a rise in crude oil prices, a rupee slide, etc. are some factors that may weigh negatively on the markets. However, long-term investors need not worry about the temporary bumps. Correction is a temporary phenomenon but growth is permanent. Therefore, continue to invest for the long term - buy right and sit tight. Happy Investing!
On the domestic front, the RBI has decided to buy Rs.40000 crore ($5.45 billion) worth of government bonds via open market operations (OMO) in November 2018 to inject liquidity into the market. The move comes amid worries of a liquidity crunch after defaults at one of the country’s largest infrastructure financing companies. Exports entered a negative zone after 5 months falling 2.15% in September on a yearly basis. Imports, however, went up by 10.45% in the last month. The trade deficit was estimated at $13.98 billion during September 2018, the lowest level in 5 months. The figure is despite a rising oil import bill amid concerns that US sanctions against Iran will remove a substantial volume of crude oil from the world markets. The overall trade deficit stood at $94.32 billion in the first six months of the current fiscal.
A report released by the World Gold Council (WGC) showed that the demand for gold in India rose 10% in Q2FY19 in volume terms to 183.2 tonnes on account of a significant drop in prices that led to bargain purchase. However, the seasonal increase in demand is expected to be muted this Dhanteras-Diwali. Forecasts released by OECD (Organization for Economic Co-operation & Development) show that the global economy is expected to achieve an annual GDP growth rate as measured in constant dollars of 3.7% between financial years 2018 and 2020 before dipping to 3.6% between financial years 2021 and 2023 and in turn pass the $100 trillion mark around the year 2022.
OECD’s long-term projections stated that China’s growth rate is expected to grow at a slower pace than that of the US in 2040. It expects China to be the top contributor to global GDP growth by a large margin in the near-term. China’s share of global GDP growth is expected to rise from 27.2% to 28.4% by the year 2023. Other countries are expected take a larger slice of the global GDP pie. USA’s share of global growth is expected to fall from 12.9% to 8.5% in 2023. India’s share of global GDP growth is expected to rise from 13% to almost 16%, a jump of three percentage points. Indonesia is likely to be in the fourth spot with an expected 3.7% share in the year 2023 and the fifth is likely to be rounded out by Brazil.
Key index surged on Monday, 29 October 2018, on sound corporate earnings. The Sensex gained 718.09 points to close at 34067.40.
Key index fell on Tuesday, 30 October 2018, due to US-China trade war cues. The Sensex slipped 176.27 points to close at 33891.13.
Key index advanced on Wednesday, 31 October 2018, on buying of equities by market participants. The Sensex was up 550.92 points to close at 34442.05.
Key index edged lower on Thursday, 1 November 2018. The Sensex was down 10.08 points to close at 34431.97. Key index settled higher on Friday, 2 November 2018, on positive results and consolidated buying. The Sensex was up 579.68 points to close at 35011.65.
National and global macro-economic figures and events will dictate the movement of the markets and influence investor sentiment in the near future.
The Diwali Muhurat Trading Session is scheduled on Wednesday evening, 7 November 2018. The Indian stock exchanges will remain open for 60 minutes on this auspicious festive.
The Indian stock markets will remain closed on Thursday, 8 November 2018, on account of Diwali Balipratipada.