Newsletter Date: 23-06-2018
It has been an eventful fortnight. While an unexpected Trump-Kim peace meet worked out well, with the promise to shut all nuclear activities & test in North Korea; G7 summit in Canada between US, Europe & Canada amongst bigger nations was unsuccessful.
Trump has been quite vocal on reducing their trade deficit with various trade partners especially china. However he has not spared even his long time European & Canadian friends. While all these countries along with India has in retaliation levied duties on American imports, contrary to our belief, it’s going to take a while before the dust settles.
Good for India is that we are more a domestic economy with just less than 9% contribution of exports to GDP against china which is more than 20%.Trump is clearly looking for a tougher negotiation.
While it is clear that growth momentum has picked up with world growth expected @3%, US @2.7% this fiscal and consequently interest rates trajectory is also upwards, clearly a faster rise in interest rates by various economies and mainly US, can put brake to the growth momentum. In my opinion, since it has taken almost a decade of efforts by the developed economies to bring growth back, they surely know what they are doing & measures will be taken by them from time to time to ensure growth is not challenged by the rise in interest rates. However this seems to be the transition period & all the cheap money are going back home again. Companies with higher leverage, will find tough this year unless they are hedged.
Coming to our own stock markets, the mid & small caps which were darlings last year are being ignored this year. To a larger extent it may be right as levered mid & small caps are more vulnerable to the rise in interest rates since their profit size are small.
But our advice to clients will be look @ debt free mid-caps as we are of the opinion that growth momentum will continue. While it is clear now that FII buying is not very material for Indian Stock Market, since DII’s have been absorbing all the selling since last 6 months, they have been sitting on sidelines mainly because they don’t believe India can stick to its fiscal deficit number of 2.5% especially because this is an election year & higher MSP, farm loan waivers are common baits given to attract voters. Crude oil is also playing spoil sport, accentuated by this trade war fears. In such a scenario best case scenario will be a range bound market with market being in range of 10000-11000 Nifty.
While it is true that it will be a challenge for government to stick to CAD of 2.5% as the current 10 year paper at 7.9% is factoring of >2.8%-3% like or 70-80 billion $. On capital side FDI & NRI deposits are expected to finance about 45-50 billion $. Hypothetically even if India were to end the BOP deficit of $20 billion, with forex reserves of $420 billion, we should be fine.
We are caught in a vicious circle, higher interest rate – lower bond prices – bond outflow (sell-off) -lower rupee – equity sell off.
CONCLUSION: In such a range bound markets advice will be rather than timing the market take advantage of averaging by SIP. For fixed income Commitments, there are various products that can fetch 7.25-7.50% of post tax returns. Be in discipline this year is what is our advice.
- - CA Jayesh Gandhi
Disclaimer: This is an informative document and opinions expressed in it are our own and not any advice. We are not SEBI registered investment advisory or research analyst. We are AMFI registered MUTUAL FUNDS DISTRIBUTOR.
