Top lessons from Friday’s market crash and the swift recovery

Indian economy has been on a path of recovery over the last four quarters. There has been a broad-based improvement in growth suggesting tapering of GST and demonetisation disruptions.

  

The current market volatility isn’t accompanied by a live event so all sorts of conjecture on the state of the market are possible. It’s very hard to ignore a high decibel noise and focus on long-term. But here is how I see it:

a. Fake news is real. Do not alter investment or trading decision without fact-based analysis. Cheap doesn’t necessarily mean quality.

b. Avoid bottom fishing or selling based on forwards and rumors. Focus on business which can deliver earnings growth with strong balance sheets.

c. Leverage positions in F&O have to be sized correctly. Smaller positions for bigger moves is ideal when volatility rises. First time traders and investors should not be exposed to the volatility of derivatives.

d. Bear and Bull markets do cause prices to over and undershoot. Remember patience is a great virtue in markets and as numbers improve markets will come back.

What’s concerning?

A) Short term triggers – There were few short Term Triggers which caused Today’s rout.

RBI’s instructions to Yes Bank to replace Rana Kapoor as CMD put a lot of stress on the bank as well as weaker peer set across banks and NBFCs. While the change in leadership could be challenging for Yes bank to maintain its growth momentum and manage the balance sheet quality, generally tight liquidity conditions indicated by tightening yield put pressure across the sector. DHFL and Indiabulls Housing Finance were the other prominent sufferers.

The uncertainty surrounding the future of IL&FS and therefore liquidity conditions are souring sentiment. Though these issues appear to be transient they can be a source of significant volatility in the short term.

B) The macroeconomic landscape remains challenging. India’s external positions remain a key source of trouble for the rupee and interest rates. Pressure on India’s CAD due to stubborn exports and exuberant imports coupled with a lull in FDI/FII flows, a stressful dollar liquidity scenario is emerging. At 8.2% 10-year yield RBI may be constrained to raise rates to fend the rupee as well as contain the rising inflationary tide.

C) An intensifying dollar liquidity vortex is squeezing emerging markets one after the other. US FED, US Treasury and Corporate action combined together is likely to remove nearly $1.12 trillion in Dollar liquidity in 2018. This would keep weaker EMs on the edge.

D) Trade wars which have been pure political rhetoric till now but with $200 billion worth of imports duty on China lurking it may become a stress point.

The silver lining 

A) India’s economic growth is reverting to normalcy although many challenges remain. The current weakness in rupee is a way of markets to self-correct. Once this round of weakness is over and stock valuations become attractive and another round of opportunities will emerge.

B) The reflation of the Indian economy, which is underway, will lead to another secular trend in India’s consumption story. Indian economy has been on a path of recovery over the last four quarters. There has been a broad-based improvement in growth suggesting tapering of GST and ‘demonetisation’ disruptions.

C) Government expenditure has been a source of support for the economy and is likely to be so in a pre-election year.

D) The best news is perhaps on the earnings front where profit growth in Q1FY19 (ex PSU banks) has been close to 20 percent and maybe a harbinger to better tidings as the IIP and core sector data indicates.

MORE WILL UPDATE SOON!!