The knock­down con­tin­ues!

Money Times - - -

Septem­ber 2018 left the mar­kets stranded in a whirlpool of macro head­winds. The sharp sell-off sparked by macro con­cerns around liq­uid­ity and sol­vency of ma­jor NBFC play­ers dom­i­nated the scene. The vo­latil­ity wit­nessed in the mar­kets last month barely matched the sweet tune of ‘Come Septem­ber’ but in­stead re­minded us of Green Day’s ti­tle song ‘Wake me up when Septem­ber ends’. The deadly macro head­winds of ris­ing crude oil prices, weak­en­ing Ru­pee, tight­en­ing liq­uid­ity, IL&FS debt de­fault and ris­ing in­ter­est rates sparked one of the most painful mar­ket cor­rec­tions in many months.

Af­ter ris­ing 3% in Au­gust and 6% in July, the Nifty lost 6% in Septem­ber and the losses be­yond the Nifty Fifty are much higher. FIIs re­mained con­stant sell­ers hav­ing sold over $24 bil­lion in 2018 so far. Mid-caps re­sumed un­der­per­for­mance in Septem­ber af­ter out­per­form­ing large-caps in Au­gust. In Septem­ber, mid-caps lost nearly 14%, un­der­scor­ing the high mar­ket vo­latil­ity and a near panic.

In­dia re­mained amongst the worst per­form­ers in Septem­ber los­ing nearly 6% whereas most other mar­kets gained. The key global mar­kets that closed higher in lo­cal cur­rency terms in Septem­ber were: Ja­pan +5%, Rus­sia +5%, China +4%, Brazil +3%, U.K. +1% and Korea +1%. No­tably, the MSCI In­dia in­dex has out­per­formed the MSCI Emerg­ing Mar­kets (MSCIEM) in­dex by 119% over the last five years. MSCI In­dia’s P/E is at a pre­mium of 74% to MSCIEM’s P/E (above its his­tor­i­cal av­er­age pre­mium of 45%).

Sec­toral trends dur­ing Septem­ber 2018 de­serve a closer look as they re­flect the pain in the econ­omy. Real Es­tate (-20%), PSU Banks (-19%), Me­dia (-15%), Auto (-13%) and NBFCs (-11%) fea­tured among the top losers in the month. Yes Bank (-47%), In­di­a­b­ulls Hous­ing Fi­nance (-32%), Ba­jaj Fi­nance (-24%), Maruti Suzuki In­dia (-19%) and Tata Mo­tors (-16%) were the top lag­gards. Tech­nol­ogy was the only sec­tor that was pos­i­tive at +1%. Wipro (+70%), Tata Con­sul­tancy Ser­vices (+5%), HCL Tech­nolo­gies (+4%), Bharat Pe­tro­leum Cor­po­ra­tion (+3%), Vedanta (+2%) were the top per­form­ers in Septem­ber on a monthly ba­sis.

What does this sharp cor­rec­tion of­fer? This is the moot ques­tion now. Even af­ter a sharp fall in Septem­ber, In­dia stands out in cal­en­dar 2018 out­per­form­ing other emerg­ing mar­kets (EMs) not­with­stand­ing the litany of con­cerns. How­ever, this has hap­pened so far without any tan­gi­ble or mean­ing­ful re­bound in earn­ings even as ex­pec­ta­tions of earn­ings re­vival stay lofty. This has in­deed ex­panded val­u­a­tion pre­mium v/s both his­tor­i­cal av­er­ages and EM peers. El­e­vated bond earn­ings yield spread is not help­ing ei­ther. The Nifty trades at 20x FY19E EPS-off from the re­cent highs but still rich!

Hence, a pru­dent strat­egy in such a sce­nario may be the oft-time tested-adage‘. When the go­ing gets tough, the tough get go­ing’. Large-caps will be pre­ferred de­spite their pre­mium over mid-caps. This is to counter an en­vi­ron­ment of chal­leng­ing macros, po­ten­tial slow­down in do­mes­tic eq­uity flows and the forth­com­ing busy po­lit­i­cal cal­en­dar. This is the time to look back at de­fen­sive sec­tors such as pharma, con­sump­tion and au­to­mo­bile. Pri­vate banks, how­ever, are still in­su­lated to the cur­rently liq­uid­ity quakes but this may not last.

Even at a con­tin­ued knock­down stage, we find so­lace in large-caps as they are in­su­lated from great pan­ics. Don’t let the mar­ket knock­down or knock out pru­dent in­vestors.

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