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Of Fall in SmallCap Stocks, Correction in HDFC Bank and Upcoming Monetary Policy Meeting

Tue, 5 Jun Pre-Open

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The correction in the BSE Smallcap Index continued as the index fell by 2.1% yesterday. After posting rocket gains of 58% in calendar year 2017, the index is down 13.6% since the beginning of 2018.

While corporate earnings remained depressed on account of disruptions by demonetization and goods and service tax, the sharp rally in 2017 was driven purely by expansion in the price/earnings (PE) multiples.

Rallies driven by PE expansion are not sustainable. And this is being witnessed in the recent correction as the corporate earnings for the March quarter have not been as impressive as expected. The recent data on corporate earnings is giving mixed signals for the road ahead.

Performance of Different Sectors in the Quarter Ended March 2018

Sectors Performing Well	Sectors Showing Stress
Automobiles	Capital Goods
Lubricants	Pharmaceutical
FMCG	Cement
Metal	Power

Source: Company data, BSE

After two years of depressed earnings, hopes of a trend reversal are high. If the recovery in earnings does not happen as expected, there could be further pain in the offering.

Correction in HDFC Bank

The stock of HDFC Bank corrected by 3% in yesterday's trade. This is after hitting an all-time high of 2,136 on 31ST May 2018. The foreign ownership cannot go beyond a maximum of 74% in the bank. On account of the recent equity dilution, holdings of FIIs have fallen below the limit of 74%. Hence, the window for buying for foreign investors has opened on June 1. This can lead to the stock remaining volatile going ahead.

Systematic Investments Plans (SIPs) Take a Hit in the month of April

Volatility in the stock markets, have led to retail investors going slow on their SIPs in the month of April. The SIP flow which peaked at Rs 7,119 crore in March 2018 have now slowed to Rs 6,690 in April 2018. This fall of Rs 420 crore is the highest as witnessed in two years.

Now many of these retail participants are first time investors who have not witnessed the markets fall in a bear market. In case of a hefty correction in the stock market, these first time investors could possibly exit their investments in panic, which could aggravate the market correction.

Rate Hike a Possibility in the Monetary Policy Meeting on 6^th June

There is a high probability that RBI in its monetary policy tomorrow, changes its stance and indicates that a hike in interest rates is quite a possibility going ahead. Infact it won't be much of a surprise if it increases the interest rates by 25 basis point.

Inflationary pressures are building up as crude recently hit US$ 80 dollars a barrel. Core inflation comprising of non-food and non-fuel components hit a 44 month high of 5.7% in April. As inflation pressure is inching up, there is a high likelihood that the RBI changes its stance from neutral to hawkish going ahead.

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