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Indian Indices Witness Volatility on Fed Comments and Demonetisation Developments
Fri, 18 Nov 11:30 am

After opening the day on a flat note, the Indian share markets have continued to trade near the dotted line. Sectoral indices are trading on a mixed note with stocks in the power sector and healthcare sector witnessing maximum buying interest. Consumer durable stocks are trading in the red.

The BSE Sensex is trading up 13 points (up 0.1%) and the NSE Nifty is trading up 9 points (up 0.1%). The BSE Mid Cap index is trading up by 0.6%, while the BSE Small Cap index is trading flat. The rupee is trading at 68.10 to the US$.

The past week was a roller coaster ride for Indian share markets. The shock from Trump victory and the bold move of demonetization by Prime Minister Narendra Modi kept markets on a roller coaster ride. The effects of the above developments are seen this week too.

Apart from the global volatility, the decision by the Indian government has created some short term chaos. Long lines, shortage of cash, frustration of money stuck in the bank has called for a rough week in India.

The recent news here is the government hinting for more demonetization steps in offing. As per the news, the next step after the overnight ban on Rs 500 and Rs 1,000 notes could be a cap on cash withdrawals, transactions, and amounts that can be held by individuals and companies.

As per a leading financial daily, the Supreme Court-constituted Special Investigation Team (SIT) had recommended a cap on Rs 3 lakh on cash transactions and Rs 15 lakh on cash holdings in July this year. However, the government may not implement this proposal by Supreme Court as it could change the threshold on the cash transactions and cash holdings. Only time can tell how things will pan out in the government's push against black money.

Also, a recent move in the demonetization drive is the government slashing the one-time exchange limit for old notes to Rs 2,000 from Rs 4,500 earlier. Also, the weekly withdrawal limit for savings bank account users had been raised to Rs 24,000 from Rs 20,000 earlier with the limit of Rs 10,000 per day being scrapped.

This indeed is a major move to curb black money and the effect of the same will be felt by the people hiding black money with them. We must commend the above decisions by the present government. Despite the overhanging fear of losing vote bank, the government has taken this massive step to curb black money.

To conclude, from a big picture perspective, the decision to ban 500 and 1000 denomination notes is certainly a move in the right direction. Along with the GST roll out, it will certainly give a big fillip to the India's growth story. Vivek Kaul has written an excellent piece explaining why Mr Modi banned the Rs 500 and Rs 1,000 notes. Here, Vivek offers some economic as well as political logic to the decision. Also, to get a detailed view of the demonetization move, please read the recent issue of The Vivek Kaul Letter (requires subscription).

The above decision has also led to volatility in the Indian stock markets. However, this volatility should not have a marked change in your investment approach. The principles of stock selection still remain the same: buying fundamentally strong companies, run by a competent management team and available at reasonable valuations.

Our Microcap Millionaires (MCM) team is of the view that the current market volatility can provide you with opportunities to make a few yet very profitable investments. The team has just put together a report that summarizes the top stocks that they think every new subscriber should make a part of the equity portion of the MCM group of stocks. Therefore, if you are starting out, there are no better stocks to start your wealth building journey through Microcap Millionaires than the ones covered in this report.

Apart from the above demonetization move, most of volatility in domestic markets is seen on the back of September quarter earnings announcements by Indian companies. As many as 50-odd BSE-listed companies are scheduled to announce their results this week. The effect of this would be seen today as well as in the upcoming trading week.

As always, there would be analysis reports on companies that provide estimates on the quarterly financial performance. And market participants will gear up to invest in stocks that will gain most of the fad.

That's the case every time. Estimates and even the actual corporate earnings every quarter tends to be a major influence on investor sentiments. The company's under or outperformance is immediately reflected in market movements. If the company beats street expectations, the stock takes off like a rocket. On the other hand, if the company misses upon street estimates by even a small amount, the stock is trashed.

In all, these announcements put investors and stock markets into frenzy.

So the question is: What can one do in order to sail safe during such times?

Being Buffett heads and taking his advice as fish to water, we think the best way to counter this volatility is to follow a long term value investing approach.

As far as our outlook over the long term is concerned, we believe that the benchmark indices can go up as much as 70% in the next two-to-three years. And Tanushree Banerjee, Equitymaster co-head of research, recently reaffirmed this claim and stated that the 70% earnings upside extends well beyond Sensex.

Here's a snippet of what she wrote -

  • Plenty of blue-chip stocks outside of the Sensex can fetch earnings growth in excess of 15% per year over the next three years. But if earnings were to grow at 15%, and if profit margins were to rise to their ten-year average of 11% from the current 9.6%, an EPS of Rs 100 can become Rs 174 by FY19. Which means an upside of 74%.

Our StockSelect team is already on the lookout for opportunities in such blue-chips. Subscribers can expect recommendations from the StockSelect team, as and when these blue chip stocks offer opportunity to invest.

On the news from global markets, Fed Chair Janet Yellen strongly hinted that improving US economy has raised chances of an interest rate hike in December.

Yellen, in a testimony to the US Congress, said that the FOMC committee judged that the case for an increase in the target range had continued to strengthen and that such an increase could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the Committee's objective.

All eyes are now set on the upcoming Federal Reserve monetary policy that is scheduled in mid-December. While 14 of 17 Fed officials expect to raise rates before the end of this year, the decision will largely depend on how markets react to Donald Trump's presidency and the upcoming economic developments in the coming days.

In our view, a possible rate hike in December by the Fed will have no less an impact on Indian financial markets than it will have in the US. The hike, however small, will lead to a global change in the direction of interest rates. One shall note that developed nations today are struggling through a period of low to no growth. The reasons are many - ranging from central bank policy measures to deleveraging and demographics. The average consumer is saddled with large debts and is looking to pay them off. This means a lower outlook for growth. This low growth scenario is one of the reasons for all the scrutiny we see over interest rates in global financial markets.

The global economic system is totally dependent upon more and more debt to achieve even a modest amount of growth. This is a giant Ponzi scheme needing more debt at the base to support the apex. The cracks are starting to appear. European banks, US corporate defaults, a realisation that negative rates are not working, earnings downgrades in the US...

The system is so unstable it may only take the flap of a black swan's wing to send it all crashing down. If you're interested in knowing what's really happening in the world of man and money, you can claim your free copy of Bill Bonner's latest book, Hormegeddon (just pay Rs 199 for shipping and handling).

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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May 23, 2017 12:24 PM

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