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Market Volatility – Autumn 2018

Dear investors,

The next couple of weeks will see market trading in a negative zone with higher volatility. This may lead to your portfolio getting into marginal negative or loss zone. We could have sold your entire position in advance and move the balance to cash and /or liquid fund. But our CIO and the portfolio management team is of the opinion that this will give us an attractive entry point for good stocks which are normally traded at a higher level. We should be able to invest into good long term bets at an attractive valuation. Hence we are putting buy trigger at an lower level in your account and staying invested in good stocks in your account. It may lead to some negative movement in your valuation in the short run but will yield better results in the ling run. And also note we are keeping a large part of your portfolio in liquid fund and making cash available with us at this moment so that we can capture these good stocks at the right point Trust that is fine with you.

Now let me explain you what is causing this volatility and negative sentiments.

1. Rupee (INR) Depreciation:

The this emerging market currency crisis was all about how the problems of individual nations were spilling over into contagion — but without dollar strength as a factor.

No longer. A nine-year high for U.S. average hourly earnings in Friday’s non-farm payroll report, combined with the strongest reading for the manufacturing PMI index since 2004, have pushed two-year Treasury yields to levels not seen 2007. Add to this that the Federal Reserve is in no position to back off its quarterly rate-hiking cycle anytime soon or halt its reversal of quantitative easing. As my colleague Mr. Ram has pointed out, the global financial system has to get used to having fewer dollars around.

Supply side constraints leading to dollar appreciation.

2. Oil Price:

Depreciating rupee and strengthening oil prices making things worse as a large amount of money in dollar is going out to buy oil for net importers like us. Though we get oil n gas I n favorable terms from Iran but there has been constant pressure from the US to curb trade with Iran (refer recent high profile visit by US secretaries and under secretaries)

Metal /Commodity price volatility
  • Metals on LME
  • Aluminium down 2.4%
  • Copper down 0.9%
  • Zinc down 2.9%
  • Nickel down 1.5%
  • Lead down 3.1%
Metals in China
  • Zinc down 1%
  • Aluminium down 1%
  • Steel down 1.6%/li>
  • ron Ore down 0.7%
  • Crude overnight up 2.5%
  • Crude today up 0.8%

Effect of Chinese possibly removing winter production ban leading to higher supplies. Current Account Deficit (CAD): Higher spending on oil export coupled with the foreign investors taking money (read dollar) out from the system causing net Deficit in current account balance (Money or Dollar in minus money or Dollar out – in simplistic term. Refer enclosed graphics. But there is no reason to worry as RBI is one of the prudent regulators and has capacity to tackle this unlike countries like Turkey and Argentina. But this will lead to higher interest rate regime (negative for both stock and bond from capital appreciation stand point).

Hence .. please stay assured that your wealth is in right hand and we are ever alert to take the advantage of this market volatility to build a long term portfolio at an attractive entry valuation.

A recent Bloomberg article indicates what we have been discussing with you over that past few weeks.

Fund Carnage Shows Peril Of Ignoring Liquidity

Indian retail investors won’t easily forgive their fund managers, nor will they quickly forget this wealth destruction. Out of 416 open-ended, onshore equity funds, 401 have lost money this year. Tech funds, the only ones to have performed decently, have been helped by Asia’s worst-performing currency of 2018, writes Andy Mukherjee.

  • Fund managers who’d hoped for private-equity type returns by discovering jewels buried in the haystacks of public markets were essentially souping up performance by forgoing liquidity
  • Now that the markets are punishing them for that recklessness, the search for the elusive alpha is over — in infrastructure; power; banking and finance; small-, mid- and micro-cap shares; transport and logistics; value stocks; state-owned firms; business cycles; and every other fad
  • With fund asset values collapsing, what happens if investors get up and leave?
Sensex, Nifty End Flat Ahead Of Diwali, But Further Troubles May Be Ahead!
  • Let me start by wishing you and your family a sparkling Diwali and a prosperous new year! Indian equity benchmarks were little changed ahead of Diwali as gains in Reliance Industries, TCS and ICICI Bank were offset by losses in State Bank of India, Axis Bank and Vedanta
  • The S&P BSE Sensex rose 0.12 percent or 41 points to 34,992 and the NSE Nifty 50 Index rose six points to 10,530
  • Investors will make ceremonial purchases in a one-hour trading session on Wednesday to mark Diwali and beginning of new Samvat
  • In Samvat 2075, Nifty clocked least gains in three years as it rose 3.13 percent, data compiled by Bloomberg showed
  • In today’s trade, eight of 11 sector gauges compiled by the National Stock Exchange ended lower led by the Nifty PSU Bank Index’s 2.2 percent drop. On the flipside, the Nifty Media Index was the top gainer, up 0.9 percent

I would like to take this opportunity to explain couple of things you would have noticed over the past few weeks. 1. Modus operandi in trade and 2. Profit booking or sometime even exiting with booking smaller losses. SiRoSa Wealth feels the market is poised for range bound trade with a strong negative bias and hence would like to protect it’s clients principal whenever needed. In this mode of extreme caution you would have seen we sometimes foregoing even a possible upside than facing downward trend. We would like to capture the trading profit in this range bound market but at the same time would like to protect the liquidity for the possible downturn to acquire stocks at an attractive valuation. Also We want to reiterate that trading allocation will not cross 50% and will be limited to the chosen universe of identified securities. Pls note the approach will change based on market situation and dynamic. You would also have seen us virtually doing nothing during the end August, September beginning as the prevailing market situation (no volatility, no significant movement within our universe whereas high-risk mid cap and small caps were taking a beating) warranted us to take that approach. But now there has been significant volatility within our chosen universe giving us to book profit for our clients and building war chest for a possible downturn. Our expectation is Nifty can take around 800 point dip before 15 December and we should be ready to capitalize that opportunity for our clients.

Good stocks at an attractive valuations, but headwind from multiple factors stopping us to go all out
  • There may be a lot of variables affecting the stock market, but the prices—far better than they were eighteen months ago—will bring cheer to Indian equities as we enter a new year
  • Indian equities currently face uncertainty from a number of sources—the U.S. Federal Reserve’s rate hike, the upcoming election year, growing trade tensions between U.S. and China and a liquidity crunch in India’s credit system stemming from infrastructure lender IL&FS’s defaults on payments. The benchmark S&P BSE Sensex, which gained more than 27 percent in calendar year 2017, has gained only 2.45 percent in 2018.
Turbulence in Indian Financial System: ” Is this India’s Lehman Moment?”
  • Indian financial markets have been going through a turbulent period over the last couple of weeks. Stock markets have slipped and shares of banks and non-banking finance companies have taken a big hit. The government and the regulators have made statements to assuage the markets and restore normalcy. On Monday, the government moved to supersede the board of Infrastructure Leasing & Financial Services Ltd., which had roiled financial markets due to a series of defaults. The Reserve Bank of India, too, has stepped in with liquidity support
  • While the actions of the government and the RBI may restore some degree of calm to the markets, we must use this moment to recognise the deeper problems in the Indian financial sector that this episode has exposed
  • Non-bank lenders need to refinance or replace about Rs 1.52 lakh crore in November as debt matures
  • More than Rs 31,000 crore of commercial papers have been redeemed in the first three days of November, according to reports by Edelweiss and ICRA. Nearly Rs 16,000 crore were redeemed on Monday alone, the prominent among them being Dewan Housing Finance Corporation Ltd.’s Rs 1,150-crore paper
  • The housing finance company, in a statement, said it repaid close to Rs 1,775 crore, and is in the process of raising further liquidity. The company has also offered to buy back all commercial papers maturing by Nov. 15, according to the statement
  • A recovery of cash flow at such lenders is crucial to revive confidence in the market at a time the country is grappling with higher crude prices, weaker rupee and liquidity crisis among NBFCs following defaults at IL&FS Ltd
  • The virtuous cycle of higher valuations driving easy capital raises, followed by cheap leverage and hence high growth, will come to a halt and will reverse in some cases.
A Credit Gap

Slower or no growth for a large share of NBFCs will create a system-wide credit shortfall. This will be especially acute in segments that NBFCs’ financing dominated: real estate and construction, commercial vehicles, affordable housing, consumer durables, construction equipment, etc. Some of the shortfalls will be met by banks, especially private sector banks. But banks will be far more selective in their lending and hence, these segments will see a reduction in credit.

GDP Growth Impact

Overall, the ‘new normal’ will be much more challenging for NBFC growth and profitability. In the short run, the reduction in credit will have a negative impact on the gross domestic product. The extent of the GDP impact will depend on how deep and long the challenging conditions prevail and on how quickly banks move in to occupy the space left vacant by NBFCs. Public sector banks will have to get back to health quickly if the GDP impact is to be contained. That may require additional capital infusion in PSU banks. Most importantly, this stress will not be limited to NBFCs or Banks, it will also impact the valuation of the companies from the real estate and construction, commercial vehicles, affordable housing, consumer durables, construction equipment, etc.

Before signing off for the week, a quick outlook on US market. US goes to midterm elections tonight. Democrats expected to take over House of Rep while Republicans control senate. Relatively muted foreign policy and discontinuity of tax cuts apart from possible lawsuits and motions against Trump likely in such scenario. Results early tomorrow morning India time. This has already been factored into the market movement and any change in the above secenario may trigger different movement.

Wishing you a blessed Shyama Puja and Lakshmi Puja night and a peaceful, prosperous, healthy Samvat 2075 ahead!!

One election results either way can not and should not change the economic growth trajectory of a country like India where economic reform more or less irreversible and privatization at the cost of existing public sector units will continue. So … Plan your investment accordingly.

Hence investors, no worries … All dips are good buying for good stocks .. and at least good averaging opportunity for existing portfolio … We were building cash war chest for these days … By that I mean .. selling all possible stocks when little bit positive as we were expecting rout … So that same good stocks can be bought at cheaper valuation.

During election results and exit polls, the markets could be very volatile. Many of you are already asking us the next course of action. Our simple recommendations – Have faith in long term secular growth trend in Indian economy irrespective of whoever is ruling it.

Happy Investing!!

Insights: Dec 15, 2018
  • Reduced the policy repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points (from 6.25% to 6%)
  • Member voted 4-2 in favour of the decision to reduce the policy repo rate by 25 basis points
  • Maintained the neutral stance of monetary policy
  • Member voted 5-1 in favour of the decision to maintain the neutral stance of monetary policy
  • Permit banks to reckon an additional 2% of Government Securities under SLR for computing LCR in a phased manner
  • CPI inflation projection for Q4FY19 reduced from 2.8% to 2.4%
  • CPI projection of H1FY20 lowered from 3.2-3.4% to 2.9-3.0% & projection for H2FY20 pegged at 3.5-3.8% vs earlier projection of 3.9% in Q3FY20 with risks broadly balanced
  • GDPprojection of FY20 reduced from 7.4% to 7.2%GDP projection for H1FY20 & H2FY20 pegged at 6.8-7.1% and 7.3-7.4% with risks evenly balanced
  • Inflation projection is based on normal monsoon in 2019
  • Early reports suggest some probability of El Nino effectsin 2019
  • Flagged concern about the sustainability of softening fuel inflation
  • Projected uncertain outlook with respect to the movement in oil price
  • Expressed concern about the elevated core inflationwith some pick up in February
  • Combined fiscal situation of States and Central Government needs careful monitoring
  • MPC notes negative output gap and domestic economy is facing headwinds on the global front
  • Lower growth and inflation projection indicates probability of further monetary easing
  • However, this is contingent upon the stance of key central banks and crude price movement
  • Likely to provide adequate system liquidity through combination of tools going forward
  • 25 bps repo rate cut with the possibility of further easing accompanied by durable liquidity injection is positive for short dated bond upto 5 year
  • Additional SLR-LCR overlap of 2% over a period is likely to negatively impact long dated bond through lower demand
  • On balance steeper yield curve is expected going forward with widened spread between longer and shorter end of the curve
  • Likely near term range for 10 year Government Securities 7.25-7.50%
Insights: Apr 05, 2019