September 2018: Volatility Rules the Roost...
Indian markets stood out like a sore thumb in September 2018 when compared to other global markets. Sensex ended the month lower by ~6.3%, while most of the other major markets ended higher. The Nikkei and Dow Jones ended higher by ~5.5% and ~1.9% respectively. On a YoY basis, all major markets have done well, except UK and China which have seen a flat performance during this period.
In the calendar year till date, the Sensex is up by ~6.4%, while the Dow, S&P 500 and Nikkei are up by about 7%, 9% and 6% respectively.
Within India, weakness was seen in stocks across the board with the indices representing mid and smallcap stocks falling by about ~14% and ~20% respectively in the month gone by. The frontline indices, Sensex and Nifty 50, ended lower by ~6.3-6.4%. With this sharp decline, gains seen in mid and smallcap stocks in the year gone by have been wiped out with the respective indices down by almost 5% and 19%. On relative terms, large caps have held their ground with the Sensex and Nifty 50 rising by ~16% YoY and ~12% YoY respectively from a year ago.
Coming to sectoral performances, barring IT stocks, losses were seen across the board. While the IT index ended marginally higher, stocks from the realty, auto, banking, and media spaces were at the receiving end, ending lower by about ~13% to 20%. Defensive sectors such as FMCG also bore the brunt of profit booking with the index down by about 10%.
On a YoY basis however, the IT stocks continue to standout with the index up by ~51% YoY. FMCG, energy, pharma and banking stocks followed suit with yearly gains of ~22%, ~23%, ~9% and ~4% respectively. Media and realty stocks continue to remain underperformers on a YoY basis falling by as much as ~18% and ~20%.
When it comes to institutional activity, foreign investors were net sellers, with a net outflow of INR 96 bn during the month. DIIs on the other hand continued with their positive inflow trend, investing a net amount of about INR 79 bn during the month.
However, when looking at the combined figure of both the type of investors, the net amount was negative for the first time since January 2017 (~INR 17 bn).
In the year till date, DIIs have invested a net amount of INR 815 bn, averaging to INR 91 bn per month. FPIs on the other hand have turned negative with a net outflow of INR 96 bn, averaging to a negative INR 11 bn per month.
Key highlights in the month gone by
India’s current account deficit (CAD) improved marginally to 2.4% of GDP in 1QFY19 from 2.5% of GDP in 1QFY18. However, the accompanying deficit on overall balance of payments (BoP) is a matter of concern. On quarterly basis, BoP registered a deficit of 1.7% of GDP - the first deficit since 3QFY17, and the widest since 3QFY12.
With an aim to curb the CAD, the government hiked custom duties on 19 items, including jet fuel, ACs and refrigerators to curb imports of non-essential goods. The hike was put into effect from midnight of September 26-27. Some of the key hikes include doubling of import duty on ACs, household refrigerators and washing machines less than ten kilograms to 20%; duty on speakers and radial car tyres hiked from 10 to 15%; duty imposed on footwear increased from 20% to 25%.
The monsoon season ended with an erratic and dysfunctional performance this year. As per IMD, the cumulative rainfall over the country ended the monsoon period 9% shy of the LPA, narrowly missing the 'drought' (>10% deficit) range. This year rainfall activity has been in deficit in each month of the season (at 5%, 6%, 7% and 22% respectively); this was last seen in 2009 (a drought year with 21% deficit monsoon). On a regional basis, all regions ended the season in a deficit, albeit of varying degrees. North-west and South India ended with marginal deficit of 2% each while Central India ended with a deficit of 7% of LPA. The NE region received scanty rainfall through the season, which ended with a 24% deficit.How have our recent recommendations fared?
The month gone by was one to test the patience of investors, with market volatility going off the charts. The volatility in September 2018 was the highest seen in the past seven to eight months as gauged by the movement in VIX, an indicator of market sentiments and uncertainty.
What has been adding to the pressure is the deteriorating health of the economy led by weaker Rupee and higher crude prices. What added to the mix was the pressure on NBFCs, led by a rating downgrade in IL&FS which triggered a sell off in the debt markets. Fund managers had to sell investment graded papers of NBFCs and HFCs, which led to higher supply of paper in market and thus higher yields followed by higher panic. All of this led to a sharp selloff, which was accentuated towards the end of the month.
This took a toll on market overall, with carnage seen particularly in the small and midcap spaces (as discussed above). To add to this, the weak Rupee and the higher crude prices have been taking a toll on investor sentiments as well; especially the FPIs whose dollar adjusted returns have been impacted by how the scenario has played out. Not to mention that the improving economic situation in the US, the rate hikes and the change in stance of the Fed (no more an accommodative stance) indicate towards rates moving to neutral levels; 10-year Treasury bonds have crossed the 3% mark. All of this has led to a selloff in the emerging markets in general, with India not being spared as well.
DII action picked up in September 2018, with net investments almost matching the sell-off of FPIs. As compared to the month of August, the SIP book doubled on a month on month basis which has provided some stability.
A few factors that will influence market movements in the short term: The volatility in crude prices and the currency movement, in addition to the upcoming result season.
This happens with a backdrop of largecap (read Nifty) valuations being above long-term averages. At the same time, the market correction in the year so far brought down valuations of almost all mid and smallcap to much more sane levels.
So, what should an investor's approach be?
Our take remains unchanged - keep an eye on the prize i.e. long-term wealth creation. For this, all investors need to do is keep a track on individual companies that are going about doing their thing…and doing their thing well!
We infact believe that one should start making the most of the market correction. The time is right to begin accumulation and building a good solid portfolio of fundamentally strong companies that are available at comfortable valuations.
But with the condition to hold on to them from a long-term perspective.
While stocks will continue to be quite shaky, we suggest investors to have the stomach and the patience to power through the volatility that is expected to transpire in the coming weeks and months.
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