Newsletter Dated: 29-09-2018
International Snapshot:
The trade war continues......In last fortnight US imposed 10% tariffs on about $200 billion worth of Chinese imports and warned China that if it takes retaliatory action they will move to Phase 3 and impose tariffs on approx $ 267 billion worth of goods.
However China still went ahead and imposed 5 to 10% tariffs on 60 billion $ worth of goods. They also refused to hold any trade talks with America .Meanwhile OPEC and Russia ruled out any immediate increase in crude output, signalling the markets that they are comfortable with crude above 80$ per Barrel pushing prices further up. Crude moved up further to reach 83$ yesterday. On 26Th Sept Federal Reserve rose interest rates by quarter percentage points, citing they see growth in US economy for at least next 2 years and so shall continue the rate hike programme. This is clearly the government of US, by US and for US, and regardless to what happens to world very bold steps are taken.
Domestic Snapshot:
Is the Bull Market Over? Are we in a Bear Market? Are we entering the Recession?
Suddenly we are hearing this in last couple of days & the sound is getting louder & louder as days pass. Well answer to all this will be known in hindsight, but surely the connection has been nasty, with Nifty down 6.5% mid cap 50 index down 14% & small cap 100 index down 19.5% in just last 1 month. ( Source: NSE INDIA)
So if our macros are not in real bad shape why such connection?
With crude oil rising day by day & consequently depreciation in rupee, there is very little room for government to do any fiscal expansion and focus on growth & there seems to be extreme uncertainty on crude oil price. Also the default by IL&FS has suddenly made money very dear in the debt markets & liquidity is the mother of all Bull Markets, “BEARS KNOW THIS VERY WELL” & so they have the best opportunity in their hand which they shall not let go; and equities take staircase while going up & take elevators while coming down.
To those who are taken by surprise to the share price of DHFL & housing finance sector as a whole let
me tell you the fall in DHFL , for that matter any NBFC & housing finance company is not necessarily backed by the poor book quality. So than why such fall???
DHFL papers were bought by most funds for approx 9 to 9.2 % for 3 to 5 years. When X ( I am not naming the fund ) fund which had IL&FS papers also , When they sensed that this can result in some redemption, thought to create some liquidity & thought to get rid of papers which they perceived to be poorer than the others they hold. When they could not find the buyer, they sold them at 11% i.e. 20% down. It means that a 100 Rs Bond was sold at some 82 Rs. Markets read this as a precursor to significant ratings downgrade for DHFL in offing. DHFL being a housing finance company, their spreads are very thin 2.5 to 3%; a sudden spike in their interest cost & that too now 2% higher than their original borrowing cost will clearly result in significant reduction in future profitability & with such profitability, they shall not think of growing books,
So a) Profitability coming down and
b) Growth coming down
And stock markets are future predicting animals (right/ wrong is not a debate) and hence the fall
So is it all over for Housing Finance Companies & NBFC’s???
While not really, those for which borrowing cost are not very high they have good times as the cost of financing the house is going to rise as these poor quality guys find it difficult to borrow at existing rates, cost seen rising from here. Clearly the Men will be separated from boys. Also this sector was heavily loaded by FII, MF & HNI’s and this will lead to a painful reshuffling.
Government has been taking measures to strengthen rupee but crude oil clearly playing a spoilsport. Increasing custom duty on some import products and reducing the borrowing programme for second half by 77000 cr will calm the bond markets to some extent. We will be closely watching under mentioned factors for reversal in trend
- Crude Price
- Rupee movement
- Liquidity Conditions
- Equity Mutual Funds Flow.
We have been talking about markets being volatile for a long time now & most of the new traders & investors have now realised what volatility means. However to an MF investor, he should not shy away from falls & volatility. While to a large community who had been doing direct MF investments in debt & equity are clueless now, for those who have been using their investment advisor’s advice this is the time to juice him. To our clients a clear advise is, our equity commitment when we entered was for 3/5/7 years and so if a DHFL falls or an infybeam falls, we are not averaging it, we are averaging our units which are a bunch of largely good stocks. If you are not convinced to increase your SIP, continue with the same amount and sit tight and don’t look at what others are saying or media is reporting. Stock Markets fall only when something bad is happened or perceived to have happened, so take this opportunity and SIP within your financial discipline and you should be fine.
- 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.
