Indian markets continued their downtrend till the end of the FY2017-18, i.e. 31st March. But this was followed by a smart recovery where they made up almost half of the losses since the highs set in January. In fact, at the time of writing (~27th April), the Nifty50 is down by only about ~4.00% from the highs made in January. And the story is same with the Sensex.

Nifty monthly returns

Why this sudden recovery in the first half of April after a negative March?

It is difficult to pinpoint the exact reason here but to some extent, it seems that several large investors had been incrementally exiting some positions to take advantage of pre-LTCG tax window that was available till 31st March. But with the window closing now, the downward pressure on markets due to LTCG-related tactical portfolio moves seems to have subsided.

Another possible reason can be the optimism induced in markets due to the fact that last-to-last quarter saw the Indian economy growing at a multi-quarter high rate of 7.2%.

After PSU Banks, is it the turn of Private Banks?

If the multi-billion dollar frauds in PSU banks discovered last month weren’t enough, it was now the turn of their private peers to spread some negativity.

Two large private sector banks, namely ICICI Bank and Axis Bank are in the news for wrong reasons. While the issues at ICICI Bank related to the alleged conflict of interest of its CEO, the issue at Axis Bank was related to alleged non-performance of its CEO.

And mind you, both the CEOs are high profile names in the banking sector.

ICICI Bank’s CEO Chandra Kochhar is being questioned for her alleged role in the deal between her husband and Videocon group, which in turn is a major client of ICICI Bank and more importantly, a big defaulter now.
The head of Videocon group has pointed out that it was SBI, which was the leader of the consortium that had lent to Videocon. The ICICI Bank was only a part of that consortium. So theoretically, there is nothing specifically questionable about ICICI Bank’s role in this case of lending. But the problem is the private deal between ICICI Bank CEO’s husband and Videocon, which is the thorn in the flesh. Interestingly, bank’s CEO was also present on the credit committee that decided on loans to the Videocon group as part of the consortium. So obviously there is one way of looking at things that highlight the potential for a conflict of interest.

The case of Axis Bank’s CEO is different and not as grave.

RBI has questioned Axis Bank’s move to allow another term for its CEO Shikha Sharma. This question is asked because in last few years, Axis Bank’s non-performing assets have risen sharply and it has also been taken to cleaners for wrongly classifying those bad assets, which led to a divergence in figures presented by the bank and those verified by the regulator.

There is no doubt that both banks have suffered reputational damage. But it is still too early and to be fair, only limited information is available in the public domain. So this development will be an interesting one to keep track of, as both the banks are big representatives of the private banking space.

Nevertheless, it is perfectly clear that even though PSU banks have been constantly facing the flak over poor business practices, their private peers aren’t as clean as they have been acting like. There are obvious questions to be raised about the poor standards of governance in these two cases.


Karnataka Elections

The stage is set for the assembly elections in Karnataka. In spite of being a state election, this will be an important event from a national perspective. The BJP led NDA is looking to displace the incumbent Congress government.

If they are able to do it with or without the support of other parties, it will send a strong message to the opposition that 2019 general elections are more or less decided in favour of the ruling alliance. On the other hand, if the Congress is able to get itself re-elected, it will be a clear indicator that Congress is slowly and steadily finding its feet after the nadir they had touched. More so, after its strong showing in BJP’s stronghold Gujarat.

Both sides have been aggressively campaigning across the states with at-times no-bars hold attack through various mediums

Interestingly, there are clear indicators that there are strong factionist undercurrents flowing within both the parties. This was evident when both Congress and BJP faced some flak from within the party after they released their first list of candidates. And the feeling among those who haven’t got the tickets is fairly strong. Reason? Candidates who have missed out on these lists on both sides feel that they are being robbed of their chances of being part of the government that will be formed in May.

So in a way, both sides are fairly confident about forming the government in Karnataka! But as is generally the case in politics, nothing can be said too early. The nation is eagerly waiting for these elections to set the tone for 2019 general elections.

RBI keeps rates stable

The RBI in its policy review meet has decided to keep the interest rates unchanged. This is on back of the decreased risk from softening of inflation over last few months. The committee also said that some comfort was brought in by GDP growth, which is projected to strengthen from 6.6% in 2017-18 to 7.4% in 2018-19.

But it has also been said that the upside risks to inflation remain. These may emancipate from the higher MSP prices announced in the budget, the staggering impact of HRA revision by various states, volatility in crude oil prices and upcoming Monsoons.

Trade war still a non-zero probability scenario

As highlighted in the last newsletter, there are no signs of easing of the US-China trade tensions. This is despite global financial heads putting pressure on both sides from pushing this further.

But both sides are continuing to issue threats as well as making protectionist moves towards each other. Though both sides are claiming that they are ready to deal with any fallout from the trade row, the fact is that it can have unexpected repercussions.

The US, as well as China, know that a full-scale trade war between the world’s two economic superpowers would hurt not just them but also unbalance the geopolitical equations and negatively impact the world trade. Hence, chances are high that the two sides will eventually reach a compromise and avoid a full-blown trade war.

R&R view on economy & markets

After a couple of slow months, Indian equities have staged a smart recovery and are more or less at the levels where they began 2018.

And this once again proves our point that it makes sense to buy stocks of fundamentally strong businesses at reasonable valuations during each correction. Many stocks of good businesses were down 10-30% in last two months.

But as markets have taken a turn for the good, the stocks of these businesses have been the first ones to recover.

On that note, we end this newsletter and as always, appreciate you for taking time to read this message. Do share your views/comments by email/comment section below.

Regards
Team Equentis