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RBI could create TARP-like structure to avoid another Franklin Templeton episode: Gaurav Garg

The selling pressure from the outbreak of COVID-19 with illiquid markets and negative sentiments on the street due to the economic slowdown left Franklin Templeton to close the scheme.

April 27, 2020 / 09:52 AM IST

The RBI may have to intervene by creating some sort of TARP-like structure. The SEBI will have to stretch its limit for loans taken by debt funds to allow for such a scheme, and if the debt market is to unfreeze, it would require considerable care of the RBI and SEBI, Gaurav Garg, Head of Research at CapitalVia Global Research Limited- Investment Advisor, said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpt:

Q) The Nifty50 fell by about 1% in the week gone by. What are your views on the market?

A) Investors are expecting another stimulus packages especially focusing on the unorganized sector. On Friday, the Nifty50 opened with a gap-down and attempted to recover in the second half of the trading session, which resulted in a closing downside by 1.71 percent at 9154.40.

On the weekly chart, the Nifty50 formed a ‘Hanging Man’ kind of pattern which indicates high selling pressure. On the daily chart, the rally from 7500 has formed a Rising Wedge pattern and any break from the level 9,100 will confirm the breakdown of the pattern and the next support levels will be 8,800 and 8,500.

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On Friday, India had witnessed the highest spike in the number of COVID-19 cases in a single day and besides that negative results over the COVID-19 vaccine had added negative value to the markets.

Q) What are the important data points and levels which one can watch out for in the coming week?

A) The Indian benchmark indices had witnessed high selling pressure on 24th April. For Nifty 9,350 will be the key resistance level to watch out for.

The volatility will be seen in the coming trading session which tests the support level of 9,000, which is having the highest open interest in the Put option, and any break down in the level will test the next level at 8,800 and on the upfront.

If the Nifty50 is able to sustain above 9,350-9,400 it may witness the move towards 9,600. Bank Nifty has closed the week at 19,587 which is having a support level at 19000 and if it sustains above it, may result in a movement towards 20,000 and 21,500 levels.

As on Friday, India VIX (volatility index) is at 39.11 which is gradually dropping from the recent high of 83 that indicates the stability in the market as compared to earlier sessions.

On the monthly options, the maximum open interest (OI) for a call option is at 9,500 followed by 10,000 and for Put options, the maximum open interest is placed at 9,000 and then towards 8,000 strike price.

Q) Small and midcaps underperformed. Does it look like things have gone from bad to worse in some stocks due to a fall in GDP growth rate? What should investors with small and midcap focused portfolios do?

A) Small and midcaps have been taking the brunt of the economic slowdown with no concrete recovery. In the near future, the condition may deteriorate further.

It will take considerable time before the economic activity catches pace and therefore investors with small and midcap focused portfolios should assess their position and exit if the losses are too much to bear and use the proceeds later to recreate portfolio when conditions improve.

In any case, if an opportunity presents to exit at a better price it would not be wrong to do so.

Q) Franklin Templeton closes 6 credit risk strategy funds. The second casualty of COVID 19 after India Nivesh. Do you think investors will again lose faith just like what we say post-2008 financial crisis?

A) The selling pressure from the outbreak of COVID-19 with illiquid markets and negative sentiments on Street due to the economic slowdown left the fund to close the scheme, however, there have been questions being raised on the investment strategies of Franklin Templeton.

Although the funds were credit risk strategy funds and it was profitable in the past, still certain investments that were made are questionable with investments done in papers with high risk and relatively lesser expected return. Such debacles tend to hurt the credibility among investors.

Q) What govt could do to mitigate credit crisis which led to winding down of Franklin Templeton schemes?

A) Franklin Templeton has shut down six of its open-ended debt mutual funds with effect from 23rd April, 2020. This step was taken by the organization due to the redemption pressure and the liquidity issues it was facing in the wake of the COVID-19 pandemic.

This suggests that the steps taken by the RBI to support liquidity were either not effective or insufficient. The government should consider taking initiatives that would bring back investors’ confidence and trust.

The RBI may have to intervene by creating some sort of TARP-like structure. The SEBI will have to stretch its limit for loans taken by debt funds to allow for such a scheme. If the debt market is to unfreeze, it would require considerable care of the RBI and SEBI.

Q) Looking at so much of volatility – are there any all-weather stocks which one can look at?

A) Stock markets are expected to remain volatile until the fears related to COVID-19 settle down. Investors need to be really cautious before investing.

Though most of the stocks are available at attractive valuations, markets are not expected to bottom out until the global sentiments settle down.

However, if investors are looking at investing their funds for the long- term, it is advisable to invest in sectors like FMCG and Pharmaceuticals. These sectors may help you reap good benefits in the near future.

Before investing, study the fundamentals as well as technical aspects of the companies you wish to invest and also map their performance against the benchmark indices.

This would help you choose stocks that are sound and may sustain the volatility in the market. Investors can consider investing in stocks like Hindustan Unilever Limited, Aurobindo Pharma Limited, Pidilite Industries Limited, Torrent Pharmaceuticals Limited, and Strides Pharma Science Limited.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Kshitij Anand is the Editor Markets at Moneycontrol.

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