NEWSLETTER DATED: 29-12-2018
International Snapshot:
Last fortnight international indices, DOW, NASDAQ, S&P 500, FTSE, DAX, CAC, all witnessed a massive correction with US indices falling as much as 10% ; before they saw some pull back in last 3 days; While US faced their country specific issues, fears of global slowdown & now even recession for developed markets is getting louder. Ever since Fed first signalled rate tightening, it was clear that money will get dearer and so somewhere in future equities which are perceived to be risky assets would become out of favour; but the pace at which Fed went hiking rates & now the fall in crude prices accentuated the fear. While we are not big fan of Mr. Trump but it appears to US that last rate hike & for that matter rate hikes in immediate near future are unwarranted.
Fear of slowdown post Brexit, US- China trade war repercussions & tight liquidity policy expected by Bank of Japan and European Central Bank has already mellowed down growth expectations. Therefore a reverse trade of sell DM (Developed market ) & buy EM ( Emerging markets ) is advocated by lot of Foreign Fund managers, which we anticipated since last 2 months. However looking at the inflows in EM’s, this trade though on the face of it looks crowded, evidences suggest it’s not, so we probably are in early stage. But from our past experience we have seen that when US markets correct, in a medium term most of the markets do not remain de-coupled, one should keep this in mind.
Also since a major fall has come in last 2 months for US, initial part of next calendar year may be next 3/6 months will be volatile with downward bias.
Domestic Snapshot:
India has shown mature behaviour until now, by not blindly copying US indices in fall & rightly so, since crude has fallen from 85$ per barrel 3 months back to 50$ per barrel last week. Every 1$ per barrel rise /fall affect our deficit by 1 billion $. With this level of crude our inflation will be really low, not warranting rate hikes, rather there is room for rate-cut if crude sustain at this level. A rate- cut can again spur demand & set the economic growth ball rolling.
Eye opener to the critics of Mr. Modi, who were mocking at the foreign visits, we got more FDI in 2018 than china in last 2 decades. We saw more than 38 billion$ of inbound deals compared with China’s 32 billion $. For global investors, macro conditions look stable if you look at big barometers; whether it be inflation, fiscal deficit or growth. Also current account deficit would move down due to oil and currency.
Government is fast moving towards rationalising GST rates & at the recent i.e. 31st GST council meet on Saturday 22nd Dec, GST on 177 items were reduced. India’s tax to GDP ratio has been consistently improving & it is now approaching 12% mark ( direct + indirect tax ) Macro factors seems to be favouring again leaving room for government spending and continuing the growth momentum. Also once most of the cases under Bankruptcy code are addressed one will see a significant increase in capex cycle, which again we have been advocating since last 2 months and stocks have moved up after that. One significant development that we would particularly watch in the next fortnight will be, how government addresses the liquidity issue in NBFC’s, as a lot of last 18 months consumer credit demand was satisfied by them and if it’s not addressed wisely, it can lead to a temporary blip in consumption; and as an evidence one will see poor sales number from 2 wheelers and 3 wheelers in January. Those who are still sitting on sidelines and waiting for election event to pass by for participating in equities , according to us it is not a wise decision, as Indian markets are now controlled by DII’s and not FII’s. DII’s have a much better understanding on ground reality and will continue to support the markets at all levels until there is any fundamental reason .
Also many market participants are arguing that the markets are optically looking stable and small & mid-caps are bleeding, which actually is true, but in our opinion they are in cooling off period and not dead & out. We would therefore not advocate to discontinue mid-cap SIP’s. If broader Indices i.e. Nifty holds between 10,000 & 11,000, SIP’s will not reduce and so all sell off may be absorbed & fortunately if the election results are one which markets like, than one will sit on sidelines forever.
The above slide will show you how expensive we were in 2008 compared to today and so don't compare 2008 like scenario with today.
- CA JAYESH GANDHI
Disclaimer: This is an informative document and opinions expressed in it are our own and not any advice. We are certified investment advisors yet to be SEBI registered. We are AMFI registered MUTUAL FUNDS DISTRIBUTOR.
