Knowledge Series

The Indian financial markets are going through a rough patch. After touching 12k Nifty highs on 3rdJune, it is observing a drastic fall. It is a matter of concern for Markets as they visualize it as a slowdown in the economy. Budgetary proposals have initiated a correction in the market. However major FPIs have started withdrawing liquidity from the Indian equity market as a result of new tax implications proposed in 2019-20budget. Domestic institutions are also adopting cautious approach because of the micro and macroeconomic factors.

The trade negotiation between China & the USA is taking an ugly turn each day. President Trump has announced a 10% tariff on remaining $300 billion of Chinese imports starting September1st2019. Such uncertainty and concerns about trade policies are putting entire world markets jittery. Asian & Indian markets are also affected largely by it. Major investors are looking for safe havens for investments till the time the world economy settles with clarity on each aspect of future trade policies.

Subdued Q1 GDP data shows that the growth rate is going down on a continuous basis. Q1 data shows the GDP growth rate at 5%, which creates panic in the Indian financial market of a slowdown in the economy. The lower-than-expected GDP print indicated that the slowdown is more persistent, underscoring the need for coordinated monetary and fiscal policy actions. After taking so much action on the fiscal aspect by Finance minister Ms. Nirmala Sitharaman, still, markets are worried about the real face of the economy. Markets are still analyzing data & steps taken by the finance ministry for creating confidence in investors.

The data published earlier this month shows eight core sector industry growths has fallen to 2.1% in the month of July, which is worrisome. It also indicates that the Indian economy is going through a slowdown. The country’s manufacturing sector activity is 15 months low. August Auto sector sales data shows a continuous fall in auto sales numbers. Largest car manufacturer Maruti Suzuki delivered a 33% fall in sales and others are also in line. Tata Motors has shown de-growth of 45%, Hyundai has shown the de-growth of 16% & Hero Moto Corp. has shown the de-growth of 20%.

From the end of August month, the rupee has fallen very aggressively. From 69.50 in August 2019 to highs of 72.36 today, the rupee has taken a sharp curve and we believe it may touch new highs of 73.50 to 74 Rupees against Dollar by next month-end. Weakening rupee is also a disaster for Indian import bill and fiscal deficit. Falling macroeconomics data, the sustained outflow from FPIs will lead to more weakness in rupee. Foreign investors sold stocks worth of Rs 5,920 crore in the domestic market in August even after the government rolled back increased tax surcharge on FPIs.

The fiscal deficit of the central government increased by 1.4% to Rs 5.47 crore in April-July 2019-20. The fiscal deficit as a percentage of full-year estimates stood at 77.8% in April-July 2019-20 compared to 86.5% touched in the corresponding period last year. The most recent goods and services tax (GST) collections data is also an indication of weak domestic demand, though the fact that indirect tax collection is growing slower than nominal GDP growth could also mean that demand that shifted to the formal sector after demonetization is again moving back to the informal sector. The government spending in key sectors gathered pace in the month of July. The increased spending comes as the Indian government pushes measures to address the slowdown concerns in the economy and enhance liquidity in the system. The indication that dues towards the private sector may have already begun to be settled, revenue expenditure rose to 34 percent of budget estimate in April-July 2019 from 27 percent in April-June 2019. The spending in the roads sector improved multifold with the total spending now 39 percent of the budget estimate from 1 percent of the budget estimate until June 2019 suggesting that dues towards road sector contractors may have already begun to settle.

The fiscal deficit funding data shows that the government has been using small savings fund to a large extent to bridge the deficit in the absence of robust revenue receipts. But in our view, this will gradually change, as on August 26thRBI has given a dividend bonanza of 1.76L Cr to the Indian government. This less expected receipt will help the government in continuous spending towards infrastructure projects, etc. and this will help in bridging gap between expenditure and revenue for the government and will also help in keeping fiscal deficit in control.

We as Indians always respected savings over consumption .However, last few quarters’ data shows negative growth in the saving rate, which has reduced from 23% to 17%. It means there is no growth happening in income but majorly individuals are cutting on savings and diverting that savings ratio towards spending. It is also a dangerous indication as it is not long term measure.Off late it will suffocate individuals which will lead to alteration in consumptions. If income is growing and then consumption is growing then it will help in GDP growth but adversity may lead to lesser demand and blurred future outlook for suffering industries like autos, consumer durables. The lower Inflation rate is still supporting this pattern but it will definitely hamper in the later stage. It will lead to less credit take off as demand will further squeeze. And if Credit takes off for the industry will go down then it may lead to lesser production then capacity which means more unemployment and more shutdowns.

There is a famous saying “Buy fear and sell greed “, But eventually major of investors are not able to implement this because pessimism in the market can shake an individual’s confidence. Where is the bottom, nobody knows and where is an upper limit nobody knows that either. Markets perform on few factors like liquidity, earnings, macroeconomics, and risk-taking capacity of investors. But a bear bug can affect all of them.

A slowdown in the economy will have direct impact, like higher unemployment, lesser demand, lesser government spending, lesser credit take off, etc. But when there is pessimism in the market then ideally, it is an opportunity for smart investors because smart investors will always buy a risk-reward ratio. Now defining, the risk-reward ratio depends on the individual. For e.g. it may be bottom for one person but for another person, it may go further down. A systematic investment pattern can help you in buying value.

Economy and market are cyclic in nature. What goes down will definitely come up and what goes up will definitely come down. For e.g. Gold was in bear phase from last 8 years wherein per 10gm was 31k in 2012 and it was nearby at the same level till Dec 2018 but since then gold has taken a sharp upward move and on 3rdSept price was 40k per 10gm (24ct ). Sensex has created a peak in Jan 2008 of 20,686 and fell to the level of 8966 in the month of Feb. 2009 which was almost a correction of 56% but markets have taken a u-turn and again touched a high in Jan 2008 and Oct 2010 again.

The cyclic and uncertain nature of markets makes it lucrative for higher returns. If markets move in a single direction then no investor will invest in these markets. Uncertainty and unpredictability are the intrinsic nature of stock markets.

Best of asset allocation and risk management can create higher alpha in an individual’s portfolio returns and vis-à-vis it helps in minimizing downward negative returns. The systematic pattern of investment can help individuals in averaging their buying which leads to better alpha on returns.

Fear is fair but too much fear will lead to ignoring opportunities available. The majority of the investors buy stocks or invest in products when stocks are on high or moderately high but they forget to book profits and sell, ones it takes a deep correction. Booking profit is also a strategy like an asset allocation. Before investing always keep a return expectation along with stop loss. If positive returns are for real, so are losses. Booking losses also help you in minimizing losses along with finding and availing the new opportunities in time.

Nothing is permanent, so is the current phase of economy and markets. No one can predict when it will settle and take opposite direction but we can be assured that day will come soon. So, as an individual, concentrate on the risk-reward ratio from the market and follow systematic investment patterns for better results.

Disclaimer: All views expressed in articles are of Mr. Rohit Khandelwal. He is AMFI & IRDA registered advisor. The author doesn’t hold any responsibility towards any accuracy of data or parameter. For any investment advice, kindly call your registered financial advisor and before investment, kindly read offer document carefully. Moneymatters and its employees don’t guarantee any returns as assured returns.