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  • After scary September, will it be 'okay October'?

    Publish Date: October 01, 2018

    September was a volatile month for domestic markets, with investor wealth worth Rs 14 lakh crore being wiped out. The S&P BSE Sensex lost over 2,400 points—a loss of 6.2%—in September, making people remember the terrible month of September in 2008.

    Continued rupee depreciation, higher crude prices, default from large financial institutions like IL&FS, higher yields, and corresponding stress in non-banking financial companies (NBFCs) have played havoc with investor sentiment. With market valuations having seen a correction, will October be a month of turnarounds or tumult?

    A recap of September

    Before delving deep into October's fortunes, let’s revisit what happened in September. The spike in bond yields hurt debt markets. Higher prices for crude oil and a depreciating currency resulted in valuation de-rating for sectors where markets perceive an earnings impact in the near to medium term.

    After the multiple defaults by IL&FS in September, liquidity crisis fears were abundant. Many listed NBFCs, including housing finance companies (like Dewan Housing), saw adverse impacts in the equity market. There was a growing feeling that the Reserve Bank of India (RBI) would hike interest rates in October.

    Also read - DHFL, IL&FS’ Friday horror show: Past, present, and future tense

    October for stocks

    One thing is for sure—volatility is likely to remain high in October. Negative global cues, the cloud over domestic factors such as elections, and the pressure on the current account deficit (CAD) and the fiscal deficit from higher crude prices will weigh on investor sentiment.

    Also read - Is hiking import duty the best way to save a falling rupee?

    Volatility can bring certain benefits though. We feel the ideal approach would be to use this volatility to add stocks that are likely to benefit from currency depreciation as well as healthy growth in the respective domains (IT and Pharma). Certain stocks that are riding the consumption growth boom could do well. Defensive sectors that have seen corrections in recent months could also offer interesting picks.

    Sectoral scan

    The impact of a weak rupee and its corresponding effect on overall cost is likely to be reflected in the sectors during Q2FY19/H2FY19.

    On a broad level, sectors like IT, pharma, textile, speciality chemicals, steel, and upstream oil companies are likely to see positive impacts.

    The negative impact could be in aviation, downstream oil companies, cement, tiles, select FMCG companies, and the power sector.

    IT companies would enjoy both foreign currency exchange translation and margin gains in the near term.

    The pharma sector is also likely to benefit positively as nearly 40% of revenues for most of the leading players come from the United States (US). Over 70% revenues are generated outside India (in dollar bills).

    For the steel sector, rupee depreciation has lifted the import parity price. This has given room to the domestic steel manufacturers to hike prices.

    The downstream oil and gas sector, including refining companies, could be negatively impacted due to higher crude oil prices and a depreciated rupee. Plus, there is a question mark over their pricing freedom during an election year. Upstream companies are benefiting from the higher crude oil price and the weaker rupee.

    Also read - Oil trade: Buy upstream companies, but avoid downstream stocks

    Interest rate hike and currency conundrum

    The rupee depreciation and higher crude prices have increased the risk of imported inflation.

    Our team of economists believes that the RBI will hike the repo rate by 25 basis points (0.25%) in the October policy. This would be done with a tweak in the policy stance to take into account the foreign exchange and crude price risks.

    As per our currency team, the bear handshake between the credit markets and the equity markets is an ominous sign for the Indian rupee. Rising oil prices, elevated levels of yields in developed markets, and emerging markets have already caused an outflow. It is being feared that the funding squeeze in the underdeveloped debt market in India can cause further damage to the rupee.

    We could see the Indian rupee depreciating towards the 75 levels versus the US dollar in spot trades. Any slip on the fiscal deficit, given that this is an election year, as well as higher inflation and rising oil prices can put further pressure on the rupee in coming months.

    Also read - Fuel prices on fire: The what, why, how and what now

    Preferred stock picks

    Automobiles: Maruti Suzuki

    Building Materials: Kajaria Ceramics, Century Plyboards, Shankara Building Products

    Capital Goods, Engineering: Genus Power Infra, L&T, Voltamp, Bharat Electronics

    Construction: Dilip Buildcon, Nagarjuna Construction, PNC Infratech

    Consumer Durables: Amber Enterprises

    Metals and Mining: Jindal Stainless (Hisar), MOIL Ltd, National Aluminium

    Oil and Gas: Petronet LNG

    Transportation: Adani Port, Container Corp, VRL Logistics and Cochin Shipyard

    In the export-oriented and defensive sectors, we like ITC, Marico in FMCG, Cyient and Persistent Systems in IT, and Akzo Nobel India and Kansai Nerolac Paints in paints.

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