How Investors should deal with the current sluggish market?Aug 23, 2019(10:52)
Currently in India, a wave of pessimism is prevailing both in equity markets and the economy thanks to a series of negative sentiment and poor macroeconomic data. The benchmark index Nifty has declined by 10 % followed by mid cap and small cap index which declined by 15-17 % resulting in the erosion of investors wealth of around Rs. 15 lakh crore on NSE listed stocks since the day of budget, indicating disappointment among the investor community.
The extension of taxation on share buyback and the hike in tax surcharge applicable to “super-rich” individuals, now also applicable to FPI trusts and AIFs (Alternative Investment Funds) dented sentiment and had an impact on fund inflows into the equity markets. Bleak consumer demand and slower growth in credit off take followed by sluggish demand outlook are also the major culprits for the correction in the equities. Data points like weak automobile numbers, low volume growth in consumption sector, declined domestic air traffic and imports indicate a slowdown.
It is quite obvious that there is an ongoing economic crisis and it is reaffirmed by the RBI Consumer Confidence Survey (July 2019) which clearly shows that consumers are losing confidence and fear job losses and rise in inflation. Corporate earnings remain subdued and have disappointed on an overall front. Even FMCG and consumption related companies reported mixed numbers. The declining growth of private consumption, tepid increase in fixed investment and muted exports are the key factors which may have led to this situation.
The domestic automobile industry which was in a boom phase during the previous year appears to be in the mid of crisis now. In the recent past, we have slipped to single-digit volume growth from a double-digit growth in automobile sales which has now drifted into a contraction phase over last three quarters. Even the government push of higher registration charges is making things worse for the sector.
Instead of focusing on EV push, the government needs to talk with the industry players and provide the necessary time to adapt to the new policies as they have invested heavily in BS-VI technologies. To clear off their inventory and boost sales, the government should think of a temporary cut in GST.
On the global front, weakening global growth was evident with widespread expectations that the Fed would be launching a rate cut cycle from July, with at least 75 bps cut by the end of the year, in order to avoid slowdown in the US. But, the Fed Chairman clarified that the rate cut was a mid-cycle adjustment, taking further rate cuts off the table. On the other hand, trade war between US & China has also contributed to the global sell-off in equities.
How will markets pan out?
For any economy to revive, consumption needs to recover for which consumer confidence needs to pick up. People will start buying cars, bikes, households and consumer durables when they have confidence in their future earnings. People seem to be worried about their daily finances in a tepid environment of lowered spending as fears of retrenchment have spiked. Considering the ongoing slowdown, the government should come out with short term plans to infuse liquidity and other measures to enhance consumer demand. Government may also increase capital expenditure or boost exports to increase economic activity. Liquidity crunch in the financial sector has pushed many companies close to bankruptcy and it has a ripple effect on many other credit dependent industries by affecting their sales and revenues.
Earlier this month, Finance Minister Nirmala Sitharaman held marathon meetings with FPIs and various industry representatives from many sectors to discuss economic concerns. Market participants are expecting various policy measures including some type of a stimulus package by the government to reverse the slowdown in the economy.
The government has to follow capitalist friendly measures and should rollback the FPI norms to pre-budget days regaining the confidence of foreign players. The government needs to act on war footing to resolve this issue by announcing stimulus measures and accelerate PSU bank recapitalization, along with the continued RBI rate cuts to increase demand and growth in the long run. Any further delay in such measures may delay recovery.
As of now, the ball is in the court of the government. If it takes the charge and announces some proactive steps to boost the economy and increase demand for housing, automobiles and other sectors, then a sharp up move can be expected in the equity markets. However, government seems to be wary of any big bang stimulus package because of its commitment to fiscal prudence. While a better than expected monsoon will help in boosting rural economy, tax sops for FPIs and other ailing sectors will revive the sentiment. As the festive season is also approaching, it is the right time for the government to win back the confidence of consumers and investors by announcing a mix of economic measures which can result in investment as well as consumption led growth.
Where are the opportunities available in this volatile market scenario?
Now the question comes when and where to invest in such a volatile market scenario. I believe that while the near term horizon may be bleak, the future for long term investment remains good. Stock markets reward patience of investors. As Warren Buffett says, “One should be fearful when others are greedy and greedy when others are fearful.” Nobody can catch the bottom or the top of any market; it is the discipline which will build wealth. I believe markets are likely to come out of the current rough phase and expect pro-growth measures from the government.
With a pickup in the economy, cyclical sectors like Capital Goods, Autos, Real Estate and Cement should gain. With the NPA cycle at its peak and as the demand for credit is likely to increase, banks will be the major beneficiaries. Stocks like Larsen & Toubro, Hero MotoCorp, Phoenix Mills and ICICI Bank are among the likely gainers followed by few more domestic consumption related companies like Pidilite Industries, Godrej Properties, Havells, Hindustan Unilever, Nestle India, Avenue Supermarts, UPL and Marico.
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