'For Indian markets the next important trigger is the RBI policy meeting on August 7, and any policy decision the government may take to stimulate the economy.'
Vivek Ranjan Misra, head of fundamental research at Karvy Stock Broking, advises investors not to panic and sell fundamentally strong stocks they have in their portfolio.
He, however, expects a meaningful market correction of 10-15 percent from its all-time high of 12088 (the 50-stock NSE Nifty made a bottom at 10880 on August 1 -- approximately 10 percent correction from 12088 -- and a bottom of 10849 on Friday before it snapped back gains to close the day at 10998; a 15 percent correction from the top could see the Nifty at 10,275) before the market settles down.
Misra spoke with Rediff.com's Prasanna D Zore about the state of the Indian economy and the measures that the government can take to stimulate demand in the Indian economy.
Where are the Indian markets headed from here and what are the factors responsible for the fall we saw in July?
Global markets were expecting a more dovish US Fed and are disappointed by “mid cycle adjustment” which has led to a rise in the dollar (DXY -- the US dollar index benchmarked against major currencies -- was at 2 year high); this is not good for emerging market equities.
For Indian equities, this is on top of the headwinds it has faced recently, like FIIs selling on account of tax proposals (latest reports indicate that the PMO and finance ministry officials held discussions on the FPIs demand to roll back the tax surcharge on their incomes; the market was abuzz with this development and the 50-stock NSE Nifty recovered from the day’s low of 10848.95 to close in the green 11,000-odd on Friday).
There are other reasons as well: firstly, the weakness in the economy has not abated as is evident by the core sector data and auto sales numbers.
Secondly, while some companies have reported good numbers, the vast number have been disappointing and the management commentary has not been encouraging.
For Indian markets the next important trigger is the RBI policy meeting (on August 7), and any policy decision the government may take to stimulate the economy.
We continue to believe that the economy should stabilise in Q2FY 2019-20 and the markets should be in better shape in a couple of quarters.
Where do you see this correction coming to an end or settling down?
We are in the midst of a meaningful correction and we expect the markets to settle when it corrects 10-15 percent from its all-time high.
The last correction that we saw last September-October was around 17 percent.
I would not expect the markets to correct more than 10-15 percent from its (June 2019) top (of 12,088 on Nifty).
What about the Indian economy worries you the most right now?
The most worrying thing potentially would be the failure of systemically important sectors like auto and real estate sector not picking up. There were expectations of brisk sales but the inventory has kept piling up because of tepid demand (in both the sectors).
Having said that, I think the economy is on a gradual mend-mode and by September or December the Indian economy should stabilise.
However, if there were to be failure of another financial institution it could further worsen the matter. That would then prolong the economic recovery and could perhaps lead to deeper correction (in the stock market).
Are we looking at a recession-like situation in India against the backdrop of international trade wars, Brexit worries, and the slowdown in India’s exports and manufacturing sector, apart from there being fear of failure of another financial institution?
We are facing a significant slowdown in the economy but one cannot call it recession or ‘recession-like’ situation yet.
What sectors would you be looking at once the expected correction of 10-15 percent materialises or once the signs of economic stabilisation become evident?
I would look at capital goods, banks and the IT sector.
Why would these three sectors be on top of your mind?
Most banks are through their NPA clean up and have cleaner balance sheets. There could be problems around the NBFC sector but banks are almost through their worst phase and once the economy revives, the credit growth should pick up and benefit the banking sector.
I do believe that this government will push spending on public infrastructure projects sooner and so I would bet on the capital goods sector.
The US Federal Reserve is not as dovish (in favour of more rate cuts) as people expect given that the US economy is already doing well to need any more stimulus.
Given the US-China trade war we believe India should emerge as a beneficiary if the US dollar hardens against the Indian rupee making our exports more competitive.
That would be a huge boost for the Indian IT companies.
What can the Indian government do to stimulate demand in the Indian economy?
To boost government spending, I think, the government will have to relax its fiscal deficit target and start spending money on public infrastructure.
Secondly, the government could look at cutting the GST rates applicable on automobiles which could help stimulate demand for the sector.
Lastly, the recapitalisation of Indian banks proposed by the finance minister will also help banks lend more and stimulate consumption demand.
Your advice to investors given that they are already smarting under a steep correction from the 12,000 level in the Nifty after the Union Budget?
Don’t get emotionally scared or panic and sell if you have invested in fundamentally strong companies with good earnings visibility.
One can also use the current correction as a good opportunity to buy.
I don’t think we are looking at a recession or bear market right now.