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Macros To Supersede The Micros – Monthly Communique – Plus Delta Portfolios

Macros to supersede the Micros – Monthly Communique – Plus Delta Portfolios

“The point of maximum uncertainty is always the point of maximum return”

The markets have received a breather from the rout of the past two months with the NIFTY stabilizing at current levels owing to improving macro factors. Concerns over exorbitant oil prices have since died down, with crude tanking 30 per cent from its four-year high hit in October. If crude stays at a depressed level of below $75/bbl we can expect a more stable INR and the RBI will be able to manage its fiscal position and interest rates better.  Going ahead we believe the election results in Dec 11 will decide the trend for the market in the next month. From a market standpoint, we believe the scope for PE expansion has ended and earnings recovery will fuel the next leg of growth. We saw a slight semblance of that in 2QFY19 as net profits of the Nifty-50 Index grew 10% YoY.

Oil Prices – Lower crude is all that the market cares about.

India’s macro position gets a significant fillip from lower crude prices as a US$10/bbl change in crude oil prices results in 55 bps impact on CAD/GDP , and a 30 bps reduction on inflation. The market has been slowly discounting the impact of declining crude prices. Lower crude prices can help the government in an election year as it reduces fuel costs and helps project a better economic picture pre-elections. But there are some challenges, the 180 exemption period for Iranian sanctions will be up for review soon and the POTUS is committed to getting Iranian oil exports to zero. Secondly, if the OPEC+  announce a collective cut in the Dec’18 meeting  then oil prices would trend higher.

Nifty and Crude

State Elections – The near term trigger

The incumbent BJP government will have to fight out state elections in five state who’s results will be announced on Dec 11th 2018.  The state elections can have an impact on market sentiments as it provides some visibility about the BJP’s prospects in the 2019 general elections.  What the market is really looking for is stability and continuity of economic policies.  In the run up to the general elections, despite nervousness, markets have always gained in 5 out of 6 elections in six months leading to the counting date. The reason for this rise is always the hope of a strong reform oriented government over a weak coalition which can hamper implementation of major economic reforms. For the state elections, We believe the market sentiments will get a severe boost if the BJP could win all three or a combination of any two of its incumbent states i.e. Chhattisgarh, Madhya Pradesh and Rajasthan.

Opinion polls suggest a close contest

Opinion Polls

Global factors: The US – China Trade War – Can India be an unlikely winner?

The imposition of tariffs on China and the logistical impediments will most likely shift trade away from China and the major beneficiaries of these supply chain shifts can be other Asian countries. There are visible opportunities in the manufacturing of ready-made garments and inorganic chemicals where China is a global leader. Industry experts indicate that local chemical players can witness approximately 40% volume growth across the next few years. In the ready-made garments industry India is the only country in the Asian region that can match the scale of China both in terms of volume and integration of supply chains. Moreover India is a major producer of cotton making it completely backward integrated without having to worry about adverse raw material fluctuations.

US China Trade War

Summing it up

Although there are inhibitions ahead for the market and the declines have affected portfolios of many investors, one must continue to participate in the markets. Setbacks in the markets are common place but over time sanctity is always reestablished. Our Plus Delta research team is working hard on positioning portfolios to capitalize on the structural shifts taking place in the economy.  This current fall has thrown up a lot of opportunities and this is the best time for investors to increase their allocation to equity. Almost everyone has the money. What they lack is the will to invest it at the right time. Today’s victors are those that worked up that courage during past declines.

Think about this- are you going to be one of tomorrows victors? For that, you have to act today.

Regards,
Aditya Iyer
Fund Manager – Plus Delta Portfolios

PS: Now you can follow Aditya Iyer on Social Media and get updates on the critical issues affecting the markets and your finances.

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