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How to Counter US Fed Rate Hike?
Thu, 17 Dec Pre-Open

After almost a decade, the US Federal Bank hiked benchmark interest rates by 0.25%. As reported in Bloomberg, Fed also signaled an increase in benchmark interest rates by 0.25% in every quarter for the calendar year of 2016. The markets have partially factored in this negative news with Foreign Institutional Investors (FII) withdrawing as much as Rs 33.27 billion so far in the month of December. However, lot of FII money still remains parked in India. Considering that FIIs have huge exposure to Indian stocks, they could contribute to significant volatility in the stock markets going forward. However there are several ways in which one can be immune from such volatility.

Firstly, one will be to be cautious of stocks wherein the FII have huge holdings. Generally it is the large-cap companies where the FIIs park a significant portion of their money. As per an article in Economic Times, in the past month, over 59% of the NSE 500 stocks with more than 10% FII holding have underperformed the broader market. However in contrast, over 70% of the index stocks with FII holding of less than 10% have outperformed the broader markets. However this does not mean that you should exit from all the stocks where the FII have significant holdings. Valuations too play an important role. One can avoid huge volatility by staying away from stocks where valuations are way too high and the holdings of FII's are significant.

Another aspect that one should focus on and be cautious of is the foreign debt on a company's balance sheet. A hike in the US benchmark interest rates means a stronger dollar and a weaker rupee. This means an adverse impact on the leverage of companies with excessive foreign debt (unless they have natural hedge when earnings are dollar based) . Due importance have to be given to interest coverage ratio, debt service coverage ratio, cash flow from operating activities while investing in such companies.

However, these all are short term measures to be followed by investors while investing in equity markets in the current scenario. Long term investors should not be much concerned about the short term volatility in the markets. We at Equitymaster believe in the bottom up approach in investing. This approach focuses more on stock specific fundamentals and valuations. And hence, makes the portfolio returns immune from economic and market cycles in the long term.

If and when the Fed rate cut offers you attractive valuations, you should not hesitate to buy fundamentally solid companies run by able managements.

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

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Nov 23, 2017 09:17 AM