Micro opportunity amid mayhem

Every market participant would have heard iconic Warren Buffet's quote "You should buy when others are selling". But, most of the participants find it difficult to execute it when markets are in free fall. With scores of quality companies trading at 50% below their respective 52-week highs, the market slowly emerging as "Paradise of Buying Opportunities". Important is to keep confidence and capital intact to exploit the current opportunity.

Whirlpool of macro headwinds have become more prominent with the US bond yields surpassing psychologically important 3% level, Indian bond yields tightening to four-year high level of 8.23%, the Indian rupee effortlessly reaching all-time low level of 72.985/$, relentless rise in petrol/diesel prices to all-time highs and Indian forex reserves falling by $27 bn in five-months reaching the level of $400 bn. Adding to the fragile sentiment on macro front, the default by IL&FS on its loans to Sidbi (probably first such default by any large Financial Institution in India) leading to credit rating downgrade to the tune of 16 notches (from AA to D) by Icra has disturbed the sentiment of money markets as they have to provide for mark-to-market on downgraded financial instruments.

As the total borrowings of IL&FS stand at an estimated Rs 90,000 crore (nearly 1% of entire Indian banking industry loan book), it's very important to address the issue to contain the contagion. As key shareholders of IL&FS (i.e. LIC, HDFC and SBI) have shown no interest to add additional funds, markets will be keenly watching the eventual resolution mechanism.

The macro meltdown is finally showing its impact in full vigour on the market. In bond yield hardening and liquidity drying scenario, the first segment that will come under pressure would be NBFCs in general and Housing Finance Companies (HFCs) in particular. The very nature of HFCs is to have negative asset-liability-mismatch (ALM) scenario wherein their liabilities (sources of financing) will have to be re-priced multiple times during the life of assets (housing loans). In an increasing interest rate scenario (such as current times), a higher proportion of shorter tenure funding against a higher proportion of long-term assets would be harmful. Further, with the events such as IL&FS default, the situation gets aggravated squeezing the liquidity from the money markets.

GDP at Two Year High: Amidst the flood of weak macro news, an important positive development of Indian GDP reaching a two-year high level of 8.2% in Q1FY19 has gone unnoticed. The country's economic growth soared powered by solid expansion in manufacturing by 13.5% in Q1FY19, the farm sector by 5.3% in Q1FY19 and gathering strength in consumer spending.

Comfort from Indian corporate earnings: Starting FY18, while macros have started to face headwinds, there is a clear uptick in Indian corporate earnings (albeit in non-BFSI companies). BFSI companies (especially PSU banks) continue to be laggards on the back of aggressive asset clean-up drive. In Q1FY19, as per Centrum Research, net sales of 40 non-BFSI companies (out of Nifty 50 companies) grew by 23.2% YoY, whereas net profit grew by 21.3%. Net interest income (NII) of 10 BFSI companies (out of Nifty 50), grew by 20.4% YoY, while net profit declined by 47.4%.

We believe top priority of investors in 2018 should be capital preservation through efficient asset allocation (increasing allocation to large caps, high-quality mid-caps, gold and hedging strategies). On the equity front, the stock selection has to be spot-on as markets have become quite unforgiving for stocks even with minor taint. So, it is crucial for investors to take professional advice backed by research.

Indian political developments will keep the markets guessing about upcoming Lok Sabha election outcome, which is quite crucial as the very foundation of 2014-2017 Indian market rally was political stability. Investors can keep the buffer of dry powder ready, to take advantage of volatility around elections.

The writer is senior VP and head of research (Wealth), Centrum Broking