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NBFCs continue to bleed; bluechip companies look attractive at current valuations..

The last week was truncated owing to markets being closed on Dusshera (Thursday). The domestic bourses ended on negative note with Nifty closed a tad above the important support level of 10,300, while Sensex registered a fall of more than 400 points.

The market remained volatile as it started the week on the positive note but failed to keep the upward momentum on the back of weak global cues. While on domestic front mixed earnings, WPI Inflation, NBFCs and housing finance companies woes have put pressure on the indices.

During the week, the Nifty made a high of 10710, while Sensex rose to a level of 35605, but could not able to sustain higher levels and recorded a fall of more than 1 percent each. Nifty fell 168 points, while Sensex was down 417 points in the last week. India's volatility index (India VIX) was up 6.2 percent last week, while largecap index fell 1.5 percent, midcap was down 1.6 percent and smallcap fell 0.5 percent.

Non-banking financial companies (NBFCs) and housing finance companies (HFCs) were remained under pressure during the last week on the concerns over credit growth due to the liquidity crisis. Also, the stocks were down because of fears that mutual funds and other large subscribers to commercial papers issued by NBFCs and HFCs would choose to not rollover the securities when they mature. In the past one month, DHFL, Indiabulls Ventures, Indiabulls Housing, PNB Housing, Repco Home Finance and Edelweiss Financial have tanked 35% to 65% as the crisis at Infrastructure Leasing & Financial Services (IL&FS) created panic and triggered a sell-off in these stocks.

On October 19, the Reserve Bank of India (RBI) announced measures to pump in funds into NBFCs with market borrowings getting costlier and banks reluctant to lend to the sector.  To help stem liquidity crisis, the RBI on Friday increased lenders' single borrower exposure limit for non-banking financial companies (NBFCs) which do not finance infrastructure, to 15 per cent of capital funds. The limit has been raised from 10 per cent and is effective up till December 31, the Reserve Bank of India said in a notification. Government securities held by them up to an amount equal to their incremental outstanding credit to NBFCs and HFCs, over and above the amount of credit to NBFCs and HFCs outstanding on their books as on October 19, 2018, as Level 1 HQLA (high quality liquid assets) under FALLCR within the mandatory SLR requirement," RBI said.  This will be in addition to the existing FALLCR of 13 per cent of net demand and time liability (NDTL), and limited to 0.5 per cent of the bank's NDTL, the central bank said. The move by RBI shows that it doesn't want NBFCs to suffer due to liquidity crisis.

On the economy front, September CPI inflation was flat at 3.77 percent against 3.69 percent, MoM, while WPI inflation rose to 5.13 percent in September from 4.53 percent in August. August IIP was at 4.3 percent versus 6.5 percent in July.

Foreign investors were net sellers last week, while domestic institutions remained buyers. The countryís foreign exchange reserves fell US$5.1 billion in the week ended October 12. This is the highest dip in seven years, according to data released by the Reserve Bank of India (RBI). Total forex reserves declined from US$399.6 billion in the previous week to $394.46 billion on October 12.  This is also the lowest foreign exchange level since over a year, caused mainly because of a fall in foreign currency assets. According to the RBIís latest monthly bulletin, the central bank sold US$1.28 trillion worth of US dollars from end March to August. Total foreign reserves have fallen by over US$30 billion since March 2018 with foreign currency assets sliding by US$29.4 billion during the same period, the RBIís data showed.

The rupee has been facing intense selling pressure for more than a month now. It depreciated by over 12 per cent this year owing to several factors like rising bond yields on government securities, rising crude oil prices which increases the trade deficit, and concerns surrounding widening fiscal expenditure given the run up to the general elections slated for next year. On Friday the exchange rate closed at Rs 73.32 against the dollar.

Global markets

China's economy grew at 6.5 per cent in the third quarter, posting slowest growth in nine years, amid intensifying trade war with the US and the mounting local governments debt which rose to $ 2.58 trillion. The GDP expanded by 6.5 per cent in the July-to-September period year-on-year, according to official GDP figures released by China's National Bureau of Statistics (NBS) on Friday.  It's down from 6.8 per cent and 6.7 per cent in the first and second quarters, respectively. The world's second-largest economy's third quarter growth was the weakest year-on-year expansion since 2009 global financial crisis. The latest figures came as China faced rising economic challenges including high debt levels and an intensifying tariff battle with Washington. US President Donald Trump imposed additional tariffs on $ 250 billion worth of Chinese exports to force Beijing to cut about $ 375 billion bilateral trade deficit. The NBS said the GDP expanded 6.7 per cent year-on-year in the first three quarters of 2018 to about 65.09 trillion yuan (about $ 9.38 trillion). It said the pace was in line with market expectations and higher than the government's annual growth target of around 6.5 per cent. The economy has expanded in a reasonable range and maintained a trend of overall stability and steady progress, China's statistical authority said, while acknowledging that the country faces more external challenges and rising downward pressure. The service sector gained 7.7 per cent year-on-year in the January-September period, picking up from a 7.6-per cent increase in the first half, and outpacing 3.4 per cent in primary industry and 5.8 per cent in secondary industry. Besides the trade war China's spiralling local government debt remained a major concern of its slowing down economy as it has risen to $ 2.58 trillion according to recent figures released by the Ministry of Finance here.

Gold

Gold imports increased by about 4 per cent to US$17.63 billion in the first half of 2018-19, inflating the country's trade deficit and fuelling worries about the current account deficit. Imports of the precious metal stood at US$16.96 billion in April-September 2017-18 financial year, according to the commerce ministry data.

Increase in gold imports pushed the country's trade deficit to US$94.32 billion in April-September 2018-19 as against US$76.66 billion in the same period last year. CAD, which is the difference between outflow and inflow of foreign exchange, widened to 2.4 per cent of the GDP in the first quarter of 2018-19. Large trade deficit and depreciation in the rupee against the US dollar are putting pressure on the CAD.

After recording a negative growth in imports till June this year, gold imports started registering double digit growth. In August it increased by 51.5 per cent to US$2.6 billion.

India is the largest importer of gold, which mainly caters to the demand of the jewellery industry. In volume terms, the country imports 800-900 tonnes of gold annually. A key festival brought little activity to the physical gold market in India this week as purchases remained significantly lower than normal with domestic prices jumping to the highest in more than two years. The most auspicious day of the year to buy gold is Dhanteras, which falls on Nov. 5, two days before the Hindu festival of Diwali. The last quarter of the year is the season of peak demand, with Indians buying almost 240 metric tons on average in the past four years, according to the World Gold Council.  Gold futures on the Multi Commodity Exchange of India Ltd. have climbed 10 per cent this year to the highest since July 2016, while overseas gold has dropped 6 per cent.

Ajconís view

Going ahead, we believe rupee movement against the dollar, volatility in oil prices, and movement of bond yields will determine the market trend. At current juncture, investors can have a stock specific approach. The current panic provides investors sitting on cash a wonderful opportunity to accumulate great companies backed by strong management at cheap valuation. Investors can gradually start building their long term portfolio in some of the top rung stocks of which many have come down 30-40 percent in the recent fall. We do believe that the market seems to be in oversold zone. However, do not rule out further correction and expect volatility to continue ahead of state elections. All said and done, we still believe that equity is a great asset class and always remember panic time is the best friend of a true investor. It is this time when one should put money in the market from medium to long term perspective.

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Ashoka Ajmera
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