Sep 25, 2017
Markets sold off sharply late last week, with the Fed proving to be the trigger for the carry trade unwind and FI selling. FIs have been regular sellers all month, but their selling picked up steam post the Fed announcement.
GST is Extending Working Capital Cycles and Causing a Slowdown, Particularly in Exports…
There is widespread confusion and delay in the processing of tax credits, which is severely hampering company working capital, particularly for exporters. The multi-tiered structure and complexity of the system, as well as system snags, have led to delays in transaction processing, elongating working capital cycles, leading to decreases in operational efficiency.
Rising Commodity Prices and Declining Consumer Sentiment Are Impacting Operating Margins…
Geopolitical tensions, rising commodity prices, rising crude are impacting operating margins. Further, we’ve been talking about a dip in consumer sentiment, and also business sentiment, which are at levels not seen in a couple of years.
The Fed’s Taper Is An Offset to Strong Domestic Flows…
Flows were holding the markets up over the past few weeks. With the Fed taper, the balance sheet unwind by the Fed will offset domestic flows and that was one of the key factors that was giving bulls confidence.
Fiscal Stimulus Is In the Cards, But…
A substantial part of the government’s rumored fiscal stimulus would have been used to bail out progressively sicker PSU banks. That won’t do the trick. Unless end-user consumption demand is generated, or jobs, or multiplier effects, any stimulus measure is likely to deliver subdued benefits.
The Fed Taper Has Muddled the Global Outlook
The Fed’s tapering announcement has muddled the picture on global economic growth. As QE and liquidity propped up markets for years, the reverse will logically be an impediment. Our expectation would be that markets are unprepared for a sustained unwind and we expect the Fed will be forced to review their positioning, but that may only be post a correction.
GST Rollout Challenges Have Contributed to a Domestic Slowdown, But Consumer Confidence Has Waned As Well…
After averaging 7.4% Real GDP growth, the Modi government is coming off its two weakest quarters of GDP, +6.1% and +5.7%. Inflation remains low at 3.3%. However, crude – or the government’s policies related to crude – continue to hurt corporate margins and consumer wallets.
Domestic car sales numbers – up +11.8% – are healthy. But the business confidence data is worrisome, at levels last seen in late 2013.
The Govt Is Considering Fiscal & Monetary Measures…
With low inflation, a government heading into an election cycle is likely to announce fiscal and monetary stimulus, and accommodative RBI if necessary, the macro data do not indicate any cause for alarm.
But Earnings & Valuations Are Concerns…
Earnings season will most likely be mixed, and valuations are high. We could be in for downside surprises.
We’ve Advocated Trimming Exposure Since 08-Aug-17 and Entered Protective Hedges for the PMS Last Week
Since 08-Aug-17, we’ve recommended investors prune their asset allocation exposure (“Déjà vu All Over Again”, 08-Aug-17) to strategic asset allocation levels, review portfolios for high valuation and high beta.
For a subset of client PMS portfolios, we deployed protective strategies late last week. For investors concerned about downside, that remains a worthwhile choice as risks remain to the downside and the upside appears muted.
For diversified portfolios, a trim to strategic levels remains a prudent decision, given valuations, as does sticking with active managers that manage downside risk prudently and adhere to valuation discipline.
We await details on the government’s stimulus plans.