The Indian Equity markets are buzzing with stocks that are trading at their fair value or under. Surprisingly there are no takers. Investors seem to be selling whatever they can. Unfortunately, no one seems to have an answer to what might be the reason behind such lack of interest amongst buyers.
The current scenario is a classic case of a shift in the global macroeconomics.
The three major reasons behind the plunging prices of Indian Stocks are
The US 10-year Treasury yield has climbed above its 4-year high 3.036 and is trading at 3.09. This indeed is an alarming sign which signals the inevitability of the rise the US Feed Funds Rate.The Dollar Index too will trigger panic buttons once it crosses the 95 mark and is currently trading at 93.45. Comex Gold is trading at 1294, below its 4-month support of 1300 also confirming the FED’s hawkish stance.
The looming danger for the Indian Equity markets stems out of the evident weakness of the INR.
Let us assume FIIs had bought a share in India when it was trading at RS.126 and the USD/INR was trading at 63 around that time. So FIIs had invested $2 for a share. At the current moment if the stock has moved up 10% and is Trading at Rs.138.6. However, the Rupee has depreciated 7.94% and is trading at 68 to a dollar. This means Rs 100 invested in stocks have yielded 10% returns while the weakness of the Rupee has given away 7.94% from the profits for every Rs.100 invested in the Indian Stocks. Thus, the net profit stands at (10 – 7.94) = 2.06%.
As if that’s not enough, the foreign investor also ends up paying 26% more towards the borrowing costs as the Fed Funds Rate has jumped 26% from 1.34 – 1.69 in the last five months. In other words, the drawdown due to a sharp rise the Fed Funds Rate is an additional 26% over the 7.94% loss from the fallin the INR. The net loss due to Currency fluctuations stand marginally above 10%. Resulting in a loss of the Foreign portfolio investor who had bought Indian Equities at their fair value.
A similar situation was played out between July 2012 and May 2014 when the INR depreciated 40% and climbed to levels of 69.13 from its lows of 49. The US Treasury Yields also climbed 69% from its lows of 1.80 to 3.04 in the same period. However, the Indian equity markets climbed approximately 40% from it lows of 4588 to 6415 in the same timeframe.
Well the reason is pretty simple. The span between 2012 & 2014 was when the Fed was busy printing notes in the aftermath of the subprime crisis. In the current scenario the Fed is all set to hikeits fund rates.We also need to add that FPIs were long in the emerging markets currency between 2012 and 2014 as the dollar remained weak due to the introduction of Quantitative Easing however this time FPIs are long in the US dollar as the Fed is expected to roll out 7 rate hikes between 2018 & 2020.
The smartest way to handle such a situation is to buy equities 10%-15% below its fair valuation. This Intelligent approach can neutralize the adverse impact of the Feds Hawkish stance in the days to come. In times such as these it’s best to fall back on the basics ” Buy when there’s blood on the streets.”