First of all, we at Citadelle would like to wish you a very happy and prosperous Diwali.
The auspicious festival of Diwali does bring a lot of joy and happiness with it; however, some may find the jarring noise of the fireworks unpleasing. Going ahead, we too ‘expect some fireworks’ in equity markets which may cause a lot of noise (volatility). We believe that the political uncertainty related to impending state elections, earnings season falling short of expectations, slowing Chinese economy and global trade tussles will add a lot of noise in the near to medium term.
While the month of October has been unpleasant, for the investors, this experience has been less of a sucker punch correction and more of a protracted beating as some of the broader indices, certainly the small and mid-caps, have been trending downward since the beginning of the year.
On the global front, the growing rift between Italy and rest of the Eurozone and the growth concerns in China are weighing negatively on the market sentiments. The trade-talks between US and China still remain in gridlock. Incremental disagreement in the trade issues will weigh in not only on US and China but all other nations that are intricately linked to their supply chain.
On the domestic front, uncertainty on commercial papers rollover is the key concern. As the wholesale funded finance companies had gradually preferred short-term commercial papers (CPs) to lower their overall cost of funds and improve profitability. Consumer discretionary spends may witness slowdown such as segments like housing, autos and consumer durables where NBFC’s lending has been a key driver of growth. However, if properly managed, the current NBFC liquidity crunch should boost Corporate Bank growth and profitability in the near term.
The Q2FY19 earnings season has not been up to the mark, whereas, the consensus expectation for FY19 earnings growth is high and the earnings season would provide a reality check.
With valuations still hovering near the +1 standard deviation, the risk-reward ratio continues to be unfavourable for equities in the short term and we continue to be cautious on equities market on a short-term basis. Any exposure towards equities shall be done in a gradual manner.
On the fixed income space, taking cognizance of the macro headwinds, we continue to recommend investments in Short-term and Accrual funds and avoid Credit risk funds.
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