Look Beyond the Current Turmoil and Extract Value


September 25, 2018 | 5461 Views

The Sensex recently took its largest plunge since February of 2018, shedding 537 points reaching 36,305.02 (24 Sep 18) while the Nifty fell below the 11,000 mark to 10,974.40 (24 Sep 18). The volatility seen in the markets over the last few days may have unnerved some investors, but there is more than market movements to be considered.

The Reasons

A myriad of factors are responsible for the latest upheaval in the markets.

Crude Prices
India imports over 80% of its oil requirements; rising international prices of crude oil has led to rising fuel prices at the pump domestically.

Weakening Rupee
The Indian Rupee has weakened by 13.5% since the beginning of the year against the US dollar, falling to 72.94 per USD. The weaker rupee has compounded the problem of rising price of imported oil.

Inflation
The weakening rupee and expensive crude tends to push up inflation in India. Higher inflation implies the possibility of a hike in interest rates by the Reserve Bank to contain the impact of price rise.

Higher Bond Yields
Another development has been the rise in bond yields (the 10-year benchmark G-sec has moved up to 8.12% from 8.08%). This has the possibility of money flowing from equity to debt.

NBFC Segment
Another factor that has spooked the markets is the upheaval among NBFCs. IL&FS Financial Services has defaulted on interest payments on commercial papers. Earlier in the month, the company defaulted on a short-term loan of Rs. 1,000 crore, which it had obtained from SIDBI. Panic gripped the markets as Dewan Housing Finance Limited (DHFL)’s NCDs were sold by DSP Mutual Fund at a high yield of 11% to prepare for redemptions from its debt funds.

Trade Wars
The ongoing trade war between the United States and China has also had a negative effective on emerging economies including India. Escalation of the war continues with the US having imposed a new 10% tariff on USD 200 billion worth of Chinese goods in August 2018. This basically means that half of China’s exports to the US are now taxed. A full blown trade war will cast a negative impact across markets.

The Opportunity

While we face these headwinds, the moot point is that these challenges are transitory and, in fact, are giving investors the opportunity to pick fundamentally strong companies at reasonable prices. The key to picking strong companies is in-depth research and vigilant monitoring of your investments over market cycles. Be a seasoned investor and think long-term.

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