Markets Face A Down Draft As Investors Rejig Strategies

Stock markets are facing a gut-wrenching moment as investors shift strategies in the global and domestic markets. The double-whammy of demonetisation and a US Fed rate hike has hit the financial markets hard, and one thing is for certain: the markets are likely to stay on the edge for some time now.

Stocks lost heavily over the last week tumbling from levels of 28200 to current levels of 26500 on the BSE Sensex. The BSE Sensex continues to remain in choppy waters with the markets falling 300 points during trade. Traders, short-term investors, punters are unwinding their long positions.

There's a silver lining, though. Banking sector is witnessing an increase in liquid funds that will boost margins and profitability significantly in the short run. Banks will have more deposits in their coffers that is being deployed strategically in government and other securities for now.

HDFC Bank, SBI were among the firm gainers rising 0.6% (Rs 1283), and 2.2% (Rs 279). Many PSU banks have also seen strong rallies of 2-4 percent. Bank of Baroda surged 5.8% (Rs 169.8).

The benefits of an increase in liquid funds is also rubbing off on the bond market. Despite a sell-off in the global bond markets, yields of domestic bonds are holding steady with the 10-year g-sec hovering at 6.6 percent. About two weeks ago, the g-secs were trading at a yield of 6.8 percent.

Banks are parking the short-term increase in surplus funds in government securities driving the demand for g-secs and countering the foreign investor selling, thus strengthening the g-sec market.

But the worst hit are the many small and mid-sized NBFCs and micro-finance companies catering to the low-income groups in the rural sector. The cash crunch at the rural level is hampering the lending and recovery business in small currency notes. As a result, Ujjivan Financial Services is down 11.5% (Rs 359), Bajaj Finance 9.5% (Rs 777), Muthooot Finance 9.2% (Rs 310), Equitas Holdings 9.7% (Rs 146), and Bharat Financial Inclusion slipped 12.1% (Rs 607).

Real estate, too, has been hit due to demonetisation that is aimed at reducing black money in the system. A lot of real estate dealings are being done through a cash component, and the withdrawal of the high denomination notes is having a big impact here. Stocks such as DLF dipped 2.5% (Rs 113) while HDIL lost 3.1% (Rs 60).

The demonetisation drive is going to hit the revenues of many real estate companies for a bit longer than expected, even as the sector could see a correction in real estate prices. Hence, a recovery can be ruled out in this sector for some time.

The broader markets, too, could remain subdued as events continue to unfold domestically and around the world. Domestically, working capital management could be hit for some companies, even as demand will reduce thus impacting the GDP growth and profitability in the country.

Internationally, the expected US Fed rate hike in December could continue to roil the global markets, including the global bond market. All this will keep the Indian markets in check.

BSE Small-cap stocks are also cooling off as retail investors shift focus from the stock markets to currency exchange. Some of the smaller companies are also expected to be impacted in their day-to-day businesses as a result of the cash squeeze.

Valuations are still lofty at PEs of 20. This is over the average PE levels of 16-17 times earnings. Besides, as a pick-up in earnings can be ruled out in the next quarter, the markets at best will move sideways, if not drift downwards.

Traders and investors are expected to re-jig their portfolios wherever possible towards companies that benefit out of the liquidity squeeze. Hence, banking stocks are expected to witness some buoyancy.

Given that the demonetisation drive is likely to take a while till it's over, there's less room for the market to see an upside any time soon. Hence, a wait on the fences is prudent for now. On top of it, with a US Fed rate hike around the corner, taking a hedge or two on existing portfolios could be a strategic precaution.