Raghvendra Nath of Ladderup Wealth Management said the panic selling is bringing down stocks to very attractive valuations and one should take advantage looking at potential upside in the next 2-3 years.
Ladderup Wealth Management
The markets have been on tenterhooks for quite a few months because of the rising oil prices, sharp depreciation in the rupee, fears of trade war and the potential political uncertainty.
The trigger for the latest meltdown is the IL&FS fiasco. The episode has also brought into focus similar concerns on the entire NBFC sector as there could be asset-liability mismatch in that segment. The nervousness around the NBFC sector started when DSP Blackrock MF could not offload Rs 200 crore worth of NCDs of DHFL and had to settle in for a sharp cut. That spooked the market taking the DHFL stock by 50 percent and heightening the concerns on the entire NBFC sector.
Most NBFCs are dependent on the institutional segment – banks, mutual funds, insurance companies – for their financial needs. If these institutions cut out the supply, many of these NBFCs may face a liquidity crunch leading to potential defaults. This fear is what has spooked the market and has spread across anything and everything.
The recent fall therefore is primarily led by these fears. The NBFCs sensing liquidity issues have cut down sharply on fresh lending which would lead to lower growth in coming quarters. Also many NBFCs were running a large margin funding book for stock market investors. I believe that most of them are reducing this book size. This is in turn leading to de-leveraging, which is forcing the stock traders to unwind their positions in various stocks.
The FPI flows have also been negative. With US interest rates climbing constantly and the INR depreciation, more outflows cannot be ruled out.
The weakness in the stock market is likely to persist for some more time. As the triggers are multiple – oil Prices, INR depreciation, de-leveraging, slowdown in credit growth etc — I do not see that the markets would see major buying interest in the next 3-4 months.
While the short term looks bleak, the corporate performance has been consistently improving. In the 1st quarter of this financial year, most manufacturing and services companies showed strong growth. The AAA PMS that we recommend had a 27 percent growth YoY in the total earnings of its portfolio. The market analysts strongly believe that the next 2-3 years are going to witness a strong earnings turnaround for the corporate India which is good news for the stock prices.
There is no other way but to patiently sit on the existing positions. If you have the risk appetite, this is the time to incrementally increase allocation to Equities. The panic selling is bringing down stocks to very attractive valuations and one should take advantage looking at potential upside in the next 2-3 years.
It is also a time to relook at the stock portfolios for people who have direct equity exposures. The panic has resulted in the highest quality stocks also falling as much as bad quality. This is an excellent opportunity therefore to shift from low quality stocks to high quality.Disclaimer: The author is Ladderup Wealth Management. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.