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Is the Market Falling or Taking a Pause? - Private Briefing

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Is the Market Falling or Taking a Pause?
Sep 7, 2018

38,896.63

That was the all-time high Sensex closing on Tuesday, 28 August.

On that day, no one could have predicted a 6-day losing streak. But that's exactly what happened.

What seemed to be a simple run up to Sensex 40,000 and higher, now doesn't seem so simple anymore.

Here's what Kunal Thanvi, editor of Smart Money Secrets, had to say...

    Yes, there's turmoil in global markets.

    Specifically, emerging markets are facing the heat.

    • Trade wars
    • Currency wars
    • Rising interest rates
    • Rising crude oil prices

    After a stellar 2017, emerging markets are in a tricky situation. These factors are threatening many countries - Argentina, Brazil, Indonesia, South Africa, Turkey, Venezuela...

    The strengthening US dollar, among other factors, has resulted in depreciation of currencies in emerging markets including India.

    In fact, the rupee is at its life time low near 72.

    This has made our markets volatile.

Indeed.

Even the great GDP growth numbers did nothing to improve sentiment.

Last week I brought you the views of Ankit Shah, editor of Equitymaster Insider about investing in these challenging times. In case you missed it, you can read it here.

The good news is that Ankit didn't stop writing about it. He wrote three more pieces about the recent volatility in the market to readers on his Insider list.

I believe, his views are worthy of a wider audience. So, I'm publishing them here. Enjoy!

    What happened?

    The Sensex came within touching distance of the 40,000 mark recently, hitting an all-time high of 38,990 on 29 August 2018.

    But since then, over the last one week, the benchmark index has shed close to 1,000 points. This, despite the fact that India's GDP is estimated to have grown at 8.2% in the quarter ended June 2018.

    So, what's worrying the markets right now?

    At the domestic level, the two key worries are rising oil prices and the depreciating rupee.

    At the global level, emerging market economies are under a dark cloud (more on this is another Insider issue).

    Let's consider the domestic concerns for a moment...

    I'd previously written about the risk of rising oil prices and the depreciating rupee in May 2018.

    All You Need to Know About Oil Prices and the Geopolitics of the Middle East (11 May 2018)

    Crude Oil Gives Indian Markets a Rude Shock (18 May 2018)

    Rising Oil Prices and Depreciating Rupee Weighing on the Markets (23 May 2018)

    Falling Rupee, Forex Reserves, and Foreign Investors Outflows (24 May 2018)

    As you know, India imports about 80% of its oil requirements. India's total import bill of crude oil and petroleum products stood at a little over US$ 100 billion during the financial year 2017-18. That's about 4% of India's GDP.

    With international crude oil prices close to US$ 80 per barrel again, it's a matter of worry for import-dependent economies like India.

    The troubles for India are further accentuated by the depreciating rupee, as the USD-INR exchange rate is within touching distance of the Rs 72 mark. It means that the import bill for India gets more burdensome.

    This increases our current account deficit and fiscal deficit.

    It will cause inflationary pressures in the domestic economy, pushing the central bank to tighten the monetary policy and raise interest rates.

    Higher interest rates are the enemy of corporate profitability and capital investments.

    Higher fuel costs also result in higher operating costs, denting profitability of companies that are vulnerable to oil prices and rupee depreciation.

    So, this predicament comes at a time when Indian corporates have just started to witness growth in earnings.

    So, will crude oil and rupee play spoilsport to the Indian bull run?

    I don't think we should jump to quick conclusions and try to second-guess the markets. Because while these factors are a net-negative for the Indian economy, there are certain sectors and companies that tend to benefit from these trends. The IT sector being one example.

    But there's one piece of data that I'd certainly like to share with you.

    Between April and August 2018, foreign investors have sold Rs 569.6 billion worth of equities and debt instruments.

    It is the flood of domestic liquidity that has kept the Indian markets buoyant in the face of the foreign investor exodus.

    As far as petrol and diesel prices are concerned, it's true that the prices of these fuels have been deregulated. The government doesn't subsidise them like before, and hence, doesn't have to bear the burden of rising prices.

    But not all petroleum products are deregulated.

    Liquified Petroleum Gas (LPG) and kerosene are still regulated and subsidised. In the Fiscal Budget 2018-19, the central government had budgeted LPG subsidy of Rs 20,377.8 crore and kerosene subsidy of Rs 4,555 crore for the ongoing financial year. So, the total budgeted petroleum subsidy for the fiscal year has been Rs 24,932.8 crore, budgeted at 0.5% of government expenditures.

    Given the rise in international crude oil prices and the additional impact of a falling rupee, this subsidy bill is set to go up.

    So, even if the government doesn't cut excise on petrol and diesel, rising oil prices do have an impact on the fiscal deficit.

    So, will the government cut excise duty on petrol and diesel?

    It has been recently reported that one of the top finance ministry officials has said that the government will not cut excise duty on petrol and diesel as it has limited fiscal space available to take any dent in revenue collections.

    In that scenario, there is a risk that higher fuel prices will set the inflation meter rising beyond the RBI's comfort range of 6% and prompt it to increase interest rates.

    The fourth bi-monthly monetary policy statement for 2018-19 is scheduled to be presented on 4 October 2018. I'm going to keep a watch and see how the macro picture evolves in the coming days and months.

    The most important thing you must remember is that this is not an ordinary year, it's an election year. So, it will be interesting to see how the Modi government balances between taking steps to gain political mileage and addressing the emerging economic challenges.

Now you know why I consider Ankit Shah to be one of our very best analysts. I'm not sure I could have done a better job explaining all this to you.

Ankit can not only understand the macro picture but he can also present it to his readers using clear and concise language. When we launched Equitymaster Insider, he was the perfect candidate for the job!

Every market day, Ankit cherry-picks one investment idea from Equitymaster's 8 premium services. This is the one idea that he thinks is the best opportunity in the market on that day.

Who gets to know about this one idea?

Those on his 'insider list' of course.

Are you on Ankit's insider list? If not, you should be.

Just click here to sign up right away for Ankit Shah's Equitymaster Insider.

The Extreme Profits Summit

Some of you might remember Richa Agarwal's Extreme Profits Summit we had conducted a few weeks back.

But we know that many of you did not have get a chance to attend the summit at that time.

After we closed the Summit last time, we received numerous letters from subscribers telling us how disappointed they were to have missed it, and asking if it was possible to make it available again.

We have good news!

We're going to conduct the event again, in just 3 days from now... at 5 P.M on Monday, 10th September to be exact.

The summit will be about the secret universe of stocks discovered by Richa which have enormous profit potential.

Luckily, with the recent correction in small caps, even highly expensive stocks have become affordable again. That's why we decided to open this opportunity to interested folks again.

But to only a limited number of people.

So don't miss out this time!

For details click here...

Warm regards,
Rahul Goel and Sarit Panackal

PS: The Extreme Profits Summit is back! If you couldn't take advantage of our last Summit for whatever reason - fret not - because you are getting another chance. Just this one time, we're going to conduct the event again... in just 3 days from now.

At 5 pm on Monday, 10th September to be exact.

You can read Richa's letters about the extraordinary potential in extreme profit stocks from the Secret Universe, click here to view her Extreme Profits series now...

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