Newsletter Dated: 13-10-2018
International Snapshot:
While emerging economies have seen their stock indices falling since last 2 months on the back of rising crude oil and dollar, party is now joined by US indices which corrected by 5% last week. In our own view a correction in US indices is much needed for the emerging and Asian economies to stop this sell (EM) Emerging Market and buy (DM) Developed Market (especially America) trade. It will not only weaken dollar but also slower down the pace of monetary tightening.
Surprisingly China’s September export growth topped the forecast showing a widening trade surplus, especially after this trade war hoopla which was going on since last 3 months. China’s exports rose 14.5% for September vs 9.8% in August 2018.
Increasingly it seems to US that Donald Trump will have to change his tough stance towards global economies after his facing ire from various organizations and countries who have been his friend for long. Also not much impact is now seen from his tough stands against his global peers, eg. Oil price rise, China exports rise, India going ahead with Iran oil purchase and Russian military purchase.
Domestic Snapshot:
Last week’s fall in broader indices (Nifty & Sensex) refreshed the memories of early 2008. Clearly the fall was swift & nasty. What was surprising was the gap downs of 3% for as many as 3 days in last 15 days especially after a 7% correction in previous fortnight. There was no hiding place, be it equity or debt, people invested in debt markets had clearly forgotten the word ‘RISK’, as last 3-4 years these had been next to risk free, with credit ratings improvement & loose monetary policy. This is the period of monetary tightening and painful adjustments, but wealth creating journey’s can’t be simple & painless.
Some significant data points of last fortnight:
- RBI left the policy rates unchanged, to most market participant’s surprise. What took economist to a further surprise was the lowering of inflation expectations of next 3 quarters.
- Revenue from GST collection totalled Rs 94,440 cr. While this seems to be low, one must acknowledge the fact that GST on lot of articles were reduced couple of months back.
- Intervention by Central Government in reduction of feul prices by 2.5 rupees per litre.
- Induction of new board headed by Uday Kotak to steer the sinking boat of IL&FS.
- Total inflow of Rs 11,172 cr into Equity Funds in the month of September out of which its heartening to see the SIP numbers of Rs 7,727 cr.
- A record Rs 2.1 trillion withdrawal from liquid funds.
- Rupee depreciation to 74.75/$ and crude touching high of 85$ plus.
Suddenly everything has started looking gloomy for us. While each one of us now know that things are turning bad & one needs to stay away from equity and now even complex debt instruments, our endeavour has always been to check, in such circumstances what can go right for India.
From India’s perspective the two main factors which can derail the global economy are crude and liquidity tightening. Crude : because around 60% of our headline inflation is affected by crude and food (freight). Inflation is the epicentre in monetary policy decision making. A fall in crude oil can clearly make our GDP grow much faster; also keeping our CAD in check. Liquidity tightening abroad, can make our debt instruments (adjusted for currency fluctuations) inattractive and result in outflows by FII from debt markets, putting stress on rupee and consequently equity markets.
Most of us will argue that FII’s have been in selling mode ever since 2015,
so why FII's important now.
Answer to this is, with low cash holdings now in most of the equity mutual funds and Indian public shying away from debt instruments, the fall in stock markets can aggravate if FII’s continue to sell at this place.
Also attractiveness towards India should be more now than in 2015,as rupee is at 74/$ now vs 62 than , US indices have moved up significantly since 2015 and India has corrected 17 odd percent from its peak. What might be holding back is election uncertainly. So there can be painful timewise correction, but most of the price wise correction is done with, according to us.
Our bullishness towards India has been, because of its demography and the variety of sectors and stocks listed on its exchanges. It will be interesting to note that in last 20 years China’s GDP has grown by 12% p.a but its equity market’s have grown only by 5 % p.a. Reason is that the growth is not broad based and lot of growing companies are not listed.
While USA and India are enjoying demographic as well as diverse sectors listed advantage.
Atleast to my readers I can assure that testing times will get over soon and so don’t make any irrational decision of stopping / switching SIP in equity on for that matter debt also, now. Consult your adviser and stay tight on his 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.