E-Conversations by Mr. Arun Thukral, MD & CEO, Axis Securities
Apr 02, 2018 | Source: AxisDirect
Equity Markets – Volatility Offers an Opportunity
Global concerns, domestic worries have led to market correction over last the two months. Trump trade policies and China’s handling of the situation will decide the outcome of the ongoing tariff war set by the US. Global trade along with global economic growth may suffer if the tariff war is intensified. US Fed hiked Fed Fund rates by 25 bps on expected lines and guided for a total of three hikes in 2018 which would be data dependent. Rise in U.S. tariffs on metals, trade tariff hikes in Chinese goods imports, and the ongoing renegotiation of the NAFTA could cloud the trade picture and pose risks to the economy and hence the expected rate hike projections. This could eventually intensify the volatility in global markets. Euro zone central bank ECB has dropped reference to ‘further quantitative easing’ in its last policy meet indicating that they are confident of Euro zone economic recovery and it need not be supported with any sort of stimulus. This move paves way for eventual winding up of QE programme followed by rate hikes probably in 2019 which would eventually absorb the excess liquidity from the market offering a recipe’ for volatility in global equity markets.
Upside risks have emerged for crude oil prices which are trading around its 3 year highs following Middle East tensions, worries about Venezuela’s production slide, decline in US inventories and expectations of OPEC led production cuts being extended into 2019. Since India imports 80% of its crude oil requirements, rise in crude prices would impact the current account deficit. Moreover, it would also have deleterious effect on inflation thereby challenging the ‘stable macro’ picture.
Monsoon 2018 is expected to be ‘normal’ following the weak La Nina conditions prevailing in Pacific Ocean and neutral IOD conditions exiting over equatorial Indian Ocean at this juncture. As we approach the monsoon months, more clarity would emerge; distribution both spatial and temporal, would hold key for the overall agricultural output. A good monsoon augurs well for the rural economy driving consumption led demand.
The economy is gathering pace with better industrial output numbers, slow but steady rising capacity utilization. All eyes would now be on the upcoming quarterly corporate earnings. So far the last two quarters viz., Q2FY18 and Q3FY18 have reported 22% and 10% YoY growth respectively compared to -4% de-growth (YoY) in Q1FY18. Improving consumer sentiments coupled with good monsoon is expected to further drive the demand thereby leading to improved capacity utilization which eventually will enable private investment in capacity creation. The resolution of non-performing assets is taking shape, albeit slowly. Good properties especially in steel and cement sector are being aggressively bid for which will lead to a drop in haircut to be taken by the creditors. As NPAs get converted to ‘performing assets’, the stress on the balance sheet would reduce allowing banks to concentrate on the regular business. Overall, the economy is on improving trend although small pitfalls/ uncertainties regarding the domestic macros (due to oil price rise) and global liquidity persists.
The markets always witness the cycles of greed and fear. Veteran investor Warren Buffet has always advised investors to focus on value instead of price. To put it in his verbatim, he urges investors to be ‘fearful when others are greedy and greedy when others are fearful’. In the current context, the advice is aptly applicable.