Caught In A Bear Grip

Rakesh Goyal
Senior Vice President
Bonanza Portfolio

INR Under Pressure

• The currency has fallen by almost 20 per cent against the USD. This has come as a negative surprise for all and has been reflected in the stock markets which have plunged by over 10 per cent since July 2013. 

Sectoral Picks

• IT sector is benefiting from the rupee movement and is in an uptrend despite Nifty plunging to lower levels. HCL Tech and TCS are the top picks in this sector. Also, private sector banks have been beaten down severely and can be bought for medium-term perspective. Pharma stocks can be picked in correction.

The current scenario of the Indian market is looking quite bearish, particularly after Nifty breached the below 5500 support level. After a relief rally up to 5525, the market is once again indicating selling pressure. This shows that investors exited their long positions as the index recovered. A major concern right now is about the continuing weakness in the Indian rupee against the US dollar. Despite a number of measures announced by the RBI, the currency has been witnessing no respite in the near term. This has also raised doubts over India’s economic health in the coming quarters. 

Rate sensitive sectors such as banking, realty and capital goods have been impacted the most. The banking sector itself has lost more than 10 per cent over the last week. Many banking stocks like YES Bank, HDFC Bank, Bank of Baroda and State Bank of India are trading at their 52-week lows. This is likely to have a cascading impact on the other fundamentals of the economy. The IIP data also has not been encouraging in the last few months.

If we study other emerging markets like those of Brazil and Indonesia, the situation there too is no better than that of India. These markets have also been facing a similar decline in their currencies, and at the forefront is Brazil’s real which has fallen by more than 20 per cent in this financial year. The Turkish lira, the Indonesian rupiah and the South African rand have also seen a 10-15 per cent fall in this period. The other common factor between India and the other emerging markets is the high current account deficit.

This sell-off in currency has been triggered after the US Fed statement indicated that it might be tapering its stimulus program in order to further strengthen its economy. The present situation has turned out be a highly challenging task for the government to balance out the currency movement and also the economic pace since any aggressive steps taken to curb the currency fall can lead to further slowing of economic growth.

As per consolidated data from various sectors, consumer durables, financial services, IT, metal and power generation have shown some improvement in terms of net profit growth in Q1FY14 on a YoY basis. The net profit margins have also improved in some sectors. The reasons can be attributed primarily to cost control measures, decline in interest expenses and raw material expenses. The net sales were however lower in many segments as compared to last year.

The currency has fallen by almost 20 per cent in the last three months against the dollar and the path from 60 to 65 has been quite fast too. This has come as a negative surprise for all and has been reflected in the stock markets which have plunged by over 10 per cent since July 2013. Investors feel that this could adversely impact the manufacturing and import industries with no indications of near-term revival of the currency. In fact, the impact will be felt across various sections of the economy.

In our opinion, the rupee will continue to be under pressure at least till the year end. As such, inflation is expected to increase significantly, given that India imports about 80 per cent of its oil requirement. Meanwhile, the import requirements for gold and other essential products are also high. Given the situation, the RBI will have a difficult task at its next monetary meet and it is likely that the interest rates may once again be increased by 25-50 bps. Among the global factors, Fed’s final outcome on its decision to either taper its stimulus program or not will impact market sentiments worldwide. Also, the currency’s movement is going to be an important decisive factor. As for the next quarter’s results, it would be best not to expect too much.

In recent times, the FII funds have been flowing out from India as well as the other emerging markets. As for the other global markets, there isn’t too much to feel good about. We feel that the trend will continue to be bearish and may lead to some consolidation at the lower levels. As of now, it is the IT sector that is benefiting from the rupee movement and is in an uptrend despite Nifty plunging to lower levels. HCL Tech and TCS are the top picks in this sector. Also, private sector banks have been beaten down severely and can be bought for medium-term perspective. As the situation will improve with time, good recovery can be expected in this sector. Pharma stocks can be picked in correction.

It would be important to maintain proper stop losses and book losses too when required. For now, 5200 should be kept as a decisive support level, below which Nifty will become more bearish.