Few days ago, Government filed an plea in NCLT for takeover of IL&FS Board. It was accepted by the NCLT with the immediate effect. The takeover or something like this had become essential to resolve the issue of inadequate amount of funds/capital remain with the IL&FS. If any Insolvency proceeding had taken place, then it could cost many of insurance companies, banks, institutional investors, mutual funds etc. Thus, what the government has done and will do with the IL&FS is in the interest of all stock market participants. This step should have impacted the markets in a positive way. But nothing positive took place even after this.
In last few days, Crude oil has also started now its next leg of journey after reports of US Sanction on Iran Oil export. Simultaneously, USD INR exchange rate has also gone up by more than Rs 2 in last 10-15 days. As of now, Brent crude is trading around $85/barrel, whereas USD INR is trading around Rs 74/dollar. Nobody knows in what range would Currency would now trade in upcoming weeks. But on the Crude Oil side, experts are now in the view that $100 is the next important level where Crude oil should see consolidation if it not remain stable at current levels.
Around mid September, IL&FS issue was just a case of a reputated Group defaulted on various interest payments.
However, as the case of IL&FS issue is getting unfolded day by day, it is becoming more clear that how much big this problem is!
In the recent board meeting of IL&FS held under the new chief i.e Uday Kotak, more than 300 subsidiaries were found working under the IL&FS Group. Earlier, the previous board had suggested this number around 150.
New board also thinks that Asset monetisation process will take some time to provide some relief to its investors. However before any asset sale plan can be executed, IL&FS has requirement of fresh funds of more than Rs 5,000 crore, which will probably collected by its existing shareholders because no outside party has interest to do this.
Working with more than 300 subsidiaries and to execute a suitable asset monetisation plan for all the subsidiaries is going to be a very difficult task for the New Board.
Thus, it can be assumed that it is going to take a very long time to restructure the whole IL&FS business and make it enough capable to generate significant profits and survivable in market.
Case of IL&FS not only affects the directly linked institutional lenders, but it is also significantly influencing FIIs to have less exposure in Indian markets.
In years 2016 and 2017, undervalued stocks and potential buy was the biggest category/basket of choices where FIIs and DIIs were haunting for the purchasing. In these two years, Corporate Governance and Quality of Management was not a matter of high consideration because every investor at that time just wanted to buy those shares which were trading at a great discount. In same period, both DIIs and FIIs were also continuesly pumping money in the equity markets because of number of reasons.
However, with the number of accidents took place in 2018, FIIs now doesn’t looks much convincing as they were earlier. Gitanjali Gems, Vakrangee, PC Jeweller, Nirav Modi Scam affected PNB, DHFL, Infibeam etc, had just lead investors to become more protective, concerned about management and to play only a safe bet during any sharp fall. Day by day, this had made Foreign investors also to remain in just leadership companies and to reduce exposure to midcaps and smallcaps. And this was the sole reason behind why Midcaps and smallcaps never seen a recovery in real terms, despite of good buying seen in Large caps during August.
Now, when AAA rated corporates like IL&FS would also start reporting fake numbers of various financial accounts, how FIIs could remain bullish on various other big corporates!
Even, rupee currency is also not supporting FIIs at all. Earlier, it was possible for Foreign investors to earn $1 by selling just 1 share trading between Rs 60-65. Now, they have to sell shares trading between Rs 70-75 to earn the same $1. This means a direct loss for Foreign investors on their investments whether their invested shares rises or not.
So overall, both Corporate Governance issues/Corporate Scams and depreciating currency have resulted in a low interest of FIIs in India. And it may continue until Rupee sees any strong recovery.
Thus, only DIIs are the ones who are cuurently supporting our share market. However if they also started pulling their hands from market, then chances are very high that various indexes could witness a sharp fall.
DIIs are still the Buyers in Market!
Despite of pressure from Crude Oil, Depreciating currency, trade war concerns, DIIs are convincingly buying shares from share market. Behind such action of DIIs, there are some reasons also.
Crude Oil, which has seen more than 10 appreciation in last few days is expected to rise further due to Sanctions on Iran Oil export from November. However, Indian Government is working on several plans to control its dependency on Crude Oil.
Promotion of Electric vehicles in india is one of major step taken by Government to reduce Oil import. Many other steps have also been taken by Government for promoting non-oil technology. But all this will show the significant impact in long-term only. Therefore, Government has to take appropriate steps to reduce short-term loss from Oil import.
According to several recent news reports, Indian Govt. may consider to continue importing Oil from Iran despite of US step. According to report, India may also consider to make payment of Iran Oil bills in the form of Rupee currency.
Another report says Saudi Arabia is willing to increase its Oil Supply in market after recent step taken against Iran.
Whereas, some news reports are saying that India may soon sign a Oil deal with Russia.
All these reports means that India really have several options to reduce its Oil Import bills despite of rising crude oil prices in markets.
In matter of Currency, rise in crude oil prices, continues outflow of FIIs money from India and several other reasons are creating this pressure. Dollar demand is increasing so heavily that Indian Currency is not getting support at any level.
However, if the Government would be able to continue importing essential goods like Crude Oil in a currency other than Dollar or at a favorable price, then it is possible to see Rupee getting stronger again against Dollar.
So, it is possible for Government to regain some Rupee value by taking appropriate steps in the remaining months before Lok Sabha Elections. However, only time will tell how much Government would be able to deal with these issues in Short-term.
Therefore, many domestic investors are in the view that these headwinds/currency and crude problems are just short term issues. In long-term, future of Indian Equity market is still positive.
But next 6-7 months ( months before Lok Sabha Elections) consist of number of events like State Elections, Q2 Earnings report, Q3 earnings report, Crude Oil and currency action, December month (this is the time when FIIs are considered as on a holiday), Budget, and action before Lok Sabha Election will all lead to a high degree of volatility and uncertainty.
How Investor should use this market?
For an investor, this market is a full of risks and opportunities. Nifty has already broke its two important supports of 10800 and then 10500 in last one month. Now, next support level for Nifty is around 10100-10150. However, the pressure of Currency depreciation is so high that Nifty can even break this support level very soon. From my personal point of view, I feel Nifty has a risk to reach around 9500 in next few weeks or month.
Also, I don’t think it would be wise to assume any Great bull rally in markets in next 6-7 months until any heavy/major positive development takes place for india. However, Selective Stocks and Sectors could face some great positive action after Q2 earnings report.
In current market, short-term opportunities will continue to appear because of series of events going to take place. To grab such opportunities, you have to hold some cash holding also. For this, you can consider to structure your portfolio like with 80 percent money in shares and remaining 20 percent as cash.
But if you are really worried about market and believes that market may even fall much more from current levels, then you can go with a structure like 40-50 percent money in shares and remaining as cash.
Keep your money as investment in shares upto 90-95% only when you feel that Share market is in a last leg of correction mood and will continue its upward trend journey very soon.
As of now, I am maintaining my personal portfolio with a holding in shares of around 70 percent and remaining 30 percent as cash to accumulate some shares and buy new ones if Nifty really reaches 9500 level. However, if Nifty starts rising from current levels and reaches above 11000 in short term, then even, I would earn a good return from my Invested Money.
Note: This Portfolio structure strategy is useful for only those whose Portfolio Value is valuable like around or above Rs 5 Lakh.
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