All is not well in the Indian stock markets.
After almost touching the 39,000 mark, the BSE Sensex is in correction mode.
There are a slew of macro concerns and uncertainties plaguing the Indian bull run.
Some of the top macro concerns include...
- Rising crude oil prices
India is heavily dependent on crude oil imports. Higher crude oil prices widen India's trade deficit.
- Falling Indian rupee against the US dollar
The Indian rupee is now the worst-performing currency in Asia. A falling rupee further increases the import bill and increases inflationary pressures on the economy.
- Rising interest rates in the US as well as India
After years of ultra-easy monetary policy and near-zero interest rates, the US Fed has been raising interest rates. The interest rates on the 10 year US treasury bonds are hovering around the 3% mark. This has resulted in an exodus of capital flow back into dollar denominated assets. Foreign investors have been dumping Indian equity and debt instruments.
The interest rate cycle has reversed in India too. In June 2018, the RBI raised the policy interest rates for the first time in four years. For four years, the central bank had either reduced interest rates or maintained status quo.
Higher interest rates are a bane for capital investments and corporate profitability.
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- Trade war between the US and China
The US-led trade war against China have escalated tensions and uncertainty in global trade. Since March 2018, US President Trump has been sounding the trade war bugle by announcing tariffs on imports of various goods. Being the biggest importer in the world, such protectionist measures by the US are a big negative for global trade.
- Election year uncertainty
The 2019 general elections are just eight months away. If the Modi-led BJP government fails to win another mandate, it will weigh negatively on the markets. Also, there are concerns that the government may take populist measures to woo the vote bank and adversely impact fiscal health.
- Indian banking and NBFC mess
For several years now, the Indian banking system has been grappling with the NPA crisis. And every time you think it's the end of the tunnel, there's more mess to be discovered.
On Friday, the Indian stock markets had a stormy session as the shares of NBFCs, particularly housing finance companies, came under sudden heavy selling pressure. One of the reasons for this sell-off was linked to the recent financial stress in the Infrastructure Leasing & Financial Services (IL&FS) Group (See more in today's Chart of the Day).
- Lofty valuations
While on one hand, the Indian corporates are on the path of earnings recovery, there's bad news coming from many fronts that's taking the wind out of the market.
But it's important to recall the flood of domestic liquidity and optimism had pushed stock prices through the roof. Indian stocks were trading at unsustainably lofty valuations.
The ongoing market correction has brought several stocks down to more reasonable valuations.
What should you do now - take advantage of the ongoing correction and buy stocks now OR wait for an even deeper correction?
When I say that many stocks have come down to relatively reasonable valuation levels, it doesn't mean they cannot correct further.
The concerns plaguing the markets right now are unlikely to disappear overnight.
So, there could be more pain in the short to medium term if the macro picture gets bleaker.
But that's beyond our control and nearly impossible to predict.
When we were in the middle of the heady bull run in 2017, did you expect some macro factors to turn negative in 2018?
Then why waste time over factors that are out of our control? Instead why not pay more attention to things that are within our control?
So, what's within your control?
- The price you pay for the stocks
- The way you react to the volatility in the market
Yes, these are your two most potent tools in the game of investing. And how you wield them decides your fortunes in the market.
So, if you have a long-term horizon and the stomach for volatility, I want to tell you that the valuations are starting to get favourable.
This is not the time to rush for the exit, but to go bargain hunting.
Chart of the Day
On Friday, 21 Sep 2018, the markets witnessed a flash crash in the afternoon when the Sensex suddenly crashed 1,100 points, before recovering some of the losses.
Yes Bank, one of the constituents of the Sensex, crashed 28.7% after the Reserve Bank of India cut CEO Rana Kapoor's tenure to just four months. He has to step down from the post by 31 January 2019.
Several brokerages that had a 'buy' view on the stock were quick to downgrade the stock after the crash.
My colleague Tanushree Banerjee, on the other hand, had been concerned about the quality of lending and management's approach in provisioning for non-performing assets. As such, she stayed away from joining the pack that was cheering the company's loan book growth. After Friday's crash, she views the situation differently and has published her latest view on Yes Bank.
But as you know, Yes Bank was not the only one at the heart of Friday's market panic.
The elephant in the room was the NBFC (non-banking financial companies) sector.
Several NBFC stocks came crashing down on Friday, Dewan Housing Finance Corporation Ltd being the leader of the pack. Nearly Rs 8,129 crore worth of the company's market cap got wiped out in a single session.
Housing Finance Stocks Take a Beating
Housing finance companies came under sudden heavy selling pressure as interest rates on their debt spiked. As I mentioned earlier, one of the reasons for this sell-off was linked to the recent financial stress in the key Indian shadow bank Infrastructure Leasing & Financial Services (IL&FS) Group.
Recently, IL&FS and its subsidiaries were downgraded directly from the highest credit rating "AAA" to "Junk". This has led to nervousness about the credit profile of other private issuers, especially NBFCs. Many investors are now rushing to sell debt securities of various housing finance companies which are heavily dependent on debt refinancing.
It must be noted that IL&FS has missed payment on more than five of its obligations since August 2018. It has total debt of US$ 12.6 billion, of which 61% is in the form of loans from banks and other financial systems.
According to Moody's Investor Services, IL&FS's outstanding debentures and commercial paper accounted for 1% and 2%, respectively, of India's domestic corporate debt market as of 31 March 2018. Its bank loans made up about 0.5% to 0.7% of banking system loans.
There are concerns that the defaults by IL&FS could cause a contagion in the Indian financial sector.
Ankit Shah (Research Analyst)
Editor, Equitymaster Insider
PS: Every day the markets are open, Ankit Shah, editor of Equitymaster Insider, cherry picks one investing idea from our 8 premium publications. This is the one idea that he considers to be the best money-making opportunity in the market. He shares this idea with an exclusive group of readers on his 'insider list'. You can join this exclusive group here.
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