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Market View for Samvat 2075

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

We thought of sharing our views on certain unfortunate but interesting development (Zee/Essel default, development in HFCs and NBFCs, Jet Airways etc) related investment and finance.

If you note our prior discussion on our preferred mode of investment you would notice that whatever we have been saying all along are proving to be an accurate but undesirable predictions.

I am summing it up here again for your easy recap.

  • Portfolio investment in Blue Chip and Index stocks part are proven to be a relatively safer cohort with decent long term return (10-12%). The large market cap, float, liquidity and high volume active trading make these safer than most of the other products and/or approaches
  • If the above portfolio is actively managed with a long term view it is capable of generating alpha over index
  • MF plans need not be a safer option and debt MFs with large exposure into corporate papers should definitely be avoided. Unfavorable risk/return trade of impacts major MF schemes which are normally viewed as safer bets, viz. *Debt*, *Balanced*, *Large/Mid/Small/Multi caps*, *Arbitrage*, *Sectoral* and many other standard and exotic fund options
  • Please note *Debt and Balanced MF Plans* are perceived to be less risky and safer than equity based ones but our view is somewhat different due to the following reasons. Apart from the Gift Fund and Liquid Fund other Debt funds normally have large exposure in Corporate Bonds which are a risky financial instruments in our opinion even if they carry highest rating. Recent examples include – ILFS, Zee (Essel), various highly rated HFCs, NBFCs etc .. leaving aside other riskier NBFCs, Telecom Companies and Airlines (Jet Airways). Some of them are already a defaulter (junk category) or in the process of default
  • Few large and famous MF houses have come out with an interesting rule (not sure whether ethical/legal) that the investor scan not liquidate/sell these MFs now as they are working out replament plan with the borrowers. and the names include biggies like HDFC and Kotak. Just imagine if you keep your money in the same/any other bank and you try to withdraw your balance and bank manager says … *sorry* .. not now ..give us time!!! Get ready for the interesting time … Unfortunate but hard fact
  • SiRoSa recommended – Only *Blue Chip Equity* and *Index Fund* with large AUM and base (here you would require active monitoring and advice) in equity category and *Liquid Fund* and *Gilt Fund* (exposure to Govt. / RBI bonds *ONLY*) with large corpus in the Debt categories. All these don’t give attractive commission to the distributers/resellers (Banks included) and hence typically your trusted asset managers (including the ones from big institutions) would never push SELL this to you
  • Lack of accountability of the institutional advisers – your typical advisor is a junior employee trying to climb difficult and competitive corporate ladder and in all probability will succumb to the month/quarter end target pressure to missell higher commission generating products not suitable to your risk appetite and long term goal!! To make things worse … They keep on hopping jobs and hence no one-on-one accountability and also lack the basic knowledge in investing while parroting the scripts given by the institutions
  • We expect stringent regulatory (SEBI, AMFI, Govt) interventions in the financial services. The industry is being disrupted by introduction of technology driven direct channels reducing distribution margins for the industry in general. This may lead to a situation currently faced by Telecom or Airline industry where past behemoths are heading towards bankruptcy. So your money may safe today with a large brand which may not be present in the longer run. (Think of ILFS, Jet Airways, BSNL, sometime back .. all were industry giants). So gone are those days when you put your money into MFs and forget ..

    Now .. what’s the way out?

    (No ..I am not here to say SiRoSa is the answer of all the pains etc. But it is for sure we need efficient and transparent intermediaries which can be trusted to cater retail segments.)
  • If you are an moderately active investor with low risk tolerance then just invest in *Index fund* for equity and *Liquid Fund* for debt thru direct channels and continue to monitor it actively. If you can’t do that on your own find out a person or entity who can do it for you. (need not be SiRoSa, but someone who is capable and whom you can trust)
  • If you are chasing an Alfa with moderate risk tolerance then active churning is needed. And you need help from specialist
  • Be extra careful while selecting Pension fund. Longer the duration greater the possibility of mismanagement!!
  • Word of caution – Don’t fall into the trap of exotic products. Exoticism is not always correlated with consistent return. The existing market structure is still evolving and if you are not an expert and just doing it for excitement/fun, we would advise you to avoid Commodities, Currency, Bitcoin etc. for investment purpose with low / moderate risk tolerance
  • SiRoSa ‘s success mantra:
    • Calibrated mix of direct equity, specific MFs (Blue Chip, Index, Liquid) and hedging thru’ Gold and stock specific arbitrage based on your risk tolerance, portfolio Dynamics and level asset diversification
    • Active churning of the index/blue chip universe based on macro economic indicator and seasonality
    • Maintaining adequate liquidity thru’ fund parking in liquid funds during the time of high vix/beta.
Insights: Apr 15, 2019