The factors triggering the current descent…

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There was a strong hope that India will be able to overcome this weak economic trend by undertaking corrective and stimulus measures. This hope did not materialise post the budget which has adapted a conventional approach to this ongoing economic slowdown. It had provided a priority to fiscal prudence than spending extra through short-term borrowing. It was also noted that there are short-falls in revenue collection which is targeted to be supplemented by charging additional taxes. As a result, there was a change in the sentiment of FIIs which triggered a fall. At the same time, the start to Q1 result showed further slowdown in domestic economy while global trend was subdued.

Due to slowdown in tax collection, the government decided to reduce spending and generate extra revenue by taxing super rich. There is a fear that this will impact FPI, changing their tendency to invest to India especially for short-term traders and trust entities. At the same time, FIIs were on a risk-off mode and global market was weak. The degree of impact will depend on how many of FIIs are investing in India through the trust route. As per experts, out of the 1900 FPI registered in India, about 30 to 40% are registered as trust. FPIs register as private trusts mainly to navigate cumbersome disclosure rules and other compliance questions. A corporate fund may have to pay a minimum alternate tax of 18.5%. In a trust structure, it may be easy to move capital in and out without paying high taxes. And finally, the impact will depend on the activeness & nature of such FPI, like if they are short-term investors it will be lower and vice-versa.

Q1 results have started coming which are largely in line with expectation. As expected banking sector is showing some traction in profitability due to low-base-effect and stability in slippages but stressed assets remain. Whereas in the case of IT sector it is marginally above expectation but outcome continues to be muted in the short to medium-term. In total, about 8 results are announced of Nifty50-index which are in-line with expectation. Overall, the expectation for Q1 is muted with PAT growth of 11% YoY compared to high valuation of 19x on a one-year-forward basis. However, there are concerns that earnings growth is unlikely to revamp as fast as it was expected to about a quarter back. While FIIs which were one of the important liquidity providers are on risk-off mode. Downgrade in earnings and slowdown in liquidity are the biggest risks in the market today.

These concerns could impact the market in the short to medium term. Supportive actions by world central banks including RBI will provide the required liquidity at lower cost of funds. This will provide a cushion to the market limiting the extent of losses during this phase of consolidation. We feel that accumulating during the next one to two quarters or SIP could be a good strategy for long-term investors. Investors will have to stick with good names, quality businesses and sectors.

Posted: July 2019

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