Invest before the bull recovers

Invest before the bull recovers

There has been a sharp correction in stock markets over the last 2 months as the NIFTY has corrected over 10% from highs of 18604 hit on 18th October 2021. SENSEX hit a high of 62245 similarly. They are currently around 16800 & 56000 respectively.

The rapidly spreading Omicron variant continues to spook investors as most countries in Europe scuttle to control the rising number of infections. Market experts believe another series of strict lockdowns could massively hurt the economic recovery prospects just a year after the global economy started taking baby steps to normalization. The Netherlands is the latest in the region to have imposed a “painful” lockdown right in the middle of festival season. The UK had already imposed travel restrictions, and countries like Germany and Austria were just recovering from their latest waves. The next fortnight will be critical as to how the new variant plays out. Till now the sense is it is spreading rapidly but is not as lethal as previous variants.

A major reason that has caused the spiraling effect on the equity markets in Asia is the hawkish stance by the central banks world-wide. The FED last week announced a faster withdrawal of stimulus package & co-incidentally it coincided with the increase in numbers from the Omicron variant. Further, to combat rising inflation it announced that it may take three rate hikes next year.

Since the Fed expressed its views on aggressively retreating from its pandemic-led stimulus, several central banks have raised rates to fight inflation in their respective countries. The Bank of England became the first major central bank to raise interest rates since the COVID-19 pandemic began from 0.1% to 0.25%. Norway raised rates for the second time this year on 16th December despite an expansion of COVID curbs, while Russia raised its policy rates for the seventh time this year on 17th December. New Zealand had also raised its interest rate last month, and Canada has suggested that it will start doing the same soon. Higher rates in the developed markets lead to FII outflow from emerging markets as the interest rate differential reduces, making the latter less appealing for investors.

Meanwhile, China’s central bank cut a benchmark lending rate on 20th December, as growth has been hit by by muted consumer spending amid Beijing’s zero-tolerance policy for controlling outbreaks and tighter regulations.

In December alone, the FIIs have net sold over Rs 30,000 cr in the cash market adding up to ~ 95,000 cr net outflows in last three months. Domestic investors, however, have net bought Rs 22,000 cr so far this month to provide some support to the markets. DIIs have been net buyers over the last 6 months, but lower amounts.

There has been a sharp correction in crude prices by 20% from ~$86/bbl to ~$70/bbl which is also leading to FII outflows. We get a lot of flows from oil money from Middle East which is expected to reduce marginally.

In India there has been a sharp depreciation of the INR close to Rs.76/$ partly due to fund outflows & FED action. The RBI needs to intervene to control the exchange rate. Further the 10 years G-sec has also been inching up towards 6.5%. This could lead to asset re-allocation from equity to debt. Over the last month we have seen various NBFCs and banks take minor rate hikes signaling a reversal in the interest rate cycle. Banks will take a MTM hit on their debt portfolio due to the increase in g-sec rates.

Among sectors to focus on I think the sharp reduction in crude prices will benefit companies whose raw materials are crude derivatives like FMCG, paints, tyres, plastics, specialty chemicals etc. Notably, OMCs have still not taken any price cuts for petrol/diesel & could make higher profits which they pass back through higher dividend payouts. Another sector in focus will be autos with the semiconductor chip shortage expected to ease out over the next few months. A depreciating INR will benefit IT stocks though they are mostly hedged in the short term.

Though the frontline indexes have seen a 10% correction, we have seen a major correction in some frontline stocks & sectors like metals & mining, banks & NBFCs, autos, pharma, economic unlocking stocks etc. Companies with higher global exposure have been hit more. Given the current scenario, we should remain cautious in the short term as another ~5% correction cannot be ruled out. Long term investors can accumulate stocks in small quantities but not go overboard extinguishing their cash holdings as I feel markets will give multiple buying opportunities over the next month.

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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 14 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.

1 thought on “Invest before the bull recovers”

  1. Pingback: The bull on the rampage in 2021 - The Tortoise

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