Investors should stay cautious, focus on quality stocks: Reliance Securities

Reliance Securities

Fears of liquidity crisis emerging from IL&FS defaults and sudden selling of Dewan Housing Finance (DHFL) bonds at higher yield has shaken investors’ confidence and sentiment in the last fortnight.

Concerns over liquidity created panic in the market and pulled down both the Nifty and BSE Sensex that lost 6 percent each in a month.

In September 2018, investors’ wealth eroded by Rs 14 lakh crore, being the steepest erosion in the last one year. While the domestic institutions continued to remain net buyers, the foreign institutional investors  sold over Rs 11,400 crore in Indian equities, marking the highest sale-off in the current fiscal.

The setback from IL&FS default and concerns over DHFL had a contagion impact, which led to a sharp correction in NBFC stocks in the last couple of days. Quality stocks like Bajaj Finance and Indiabulls Housing lost 10 to 20 percent in a week.

Consistent rise in the crude oil prices, weakness in the Indian rupee, rate hikes by the US Federal Reserve and looming concerns over India’s current account deficit added to the woes and are likely to weigh on sentiments in October 2018.

However, any positive surprise from the September 2018 ended FY19 quarterly earnings may aid to restore the sentiments.

Government action may tame the contagion

IL&FS back to back defaults of commercial papers and short-term loans raised concerns on liquidity, which rattled stock markets on worries that IL&FS will have a contagion impact on the entire NBFC pack.

However, government action to supersede the existing board of IL&FS and appoint a new six-member board is expected to bring some respite as there is a strong belief that the institution will not simply be let to go bankrupt.

However, going ahead, it will not be easy for the NBFCs to maintain a sustainable robust growth with visible spikes in cost of funding.

Rupee unlikely to weaken further

Higher crude prices along with weakening Indian rupee is a double whammy for the Indian economy in the context of widening current account deficit.

We believe the crude prices to be volatile with an upward bias until there is actual clarity on the impact of the US sanctions on Iran to come in effect from November 4.

Further, the government has undertaken various initiatives to stem the rupee slide. They include higher import duties in non-essential products, increase in debt investment limit for the FPIs, exemption of withholding tax in masala bonds, etc.

In addition, the government has more options to arrest rupee's further downtrend by issuing NRI Bonds and more OMOs by the Reserve Bank of India.

We still believe India is better-placed compared to last steep slide seen in the rupee in 2013, as the country currently has strong forex reserves, which is sufficient for more than eight months of import as against merely three months in 2013.

Investors should be cautious

We still maintain our stance that investors should maintain a cautious investment approach, as various developments across domestic and overseas markets may wipe out their capital.

Hence, we advise the investors to invest in quality companies having scalability, robust visibility and comfort valuations.

Further, a strong corporate governance standard is needed to be looked at for quality investment in equities.

We still believe consumption and export-related sectors like IT should do well in the near to medium terms considering strong dollar and government’s thrust to revive the rural economy.