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Avoid chasing illiquid assets

With markets declining more than 15% and several stocks down almost 30-35% this year so far, many investors seem to feel they have to take more risk

Short-term formation on Sensex still weaker

Short-term formation on Sensex still weaker 

Amidst weak global markets, relentless FII sales, soaring inflation, rising bond yields and expectations of further monetary tightening by the global central banks; the domestic stock markets remained under selling pressure for the second consecutive week. For the week, BSE Sensex declined 2,041.96 points (3.72 percent) to close at 52,793.62, while the Nifty shed 629.05 points (3.83 percent) to end at 15,782.20 levels. In broader market, the BSE Mid-cap index lost 5.6 percent and the Small-cap index shed 6.5 percent. It is pertinent to observe that in the month of May so far, both the Sensex and Nifty have lost more than seven percent each. In the month of May so far, FIIs have sold equities worth Rs32,701.03 crore and DIIs purchased equities worth Rs26,735.36 crore. With Rupee touching new low (77.63) in last week, Dollar-Rupee movement will remain in focus in the week ahead. The CPI inflation in April 2022 surged to 7.79% (March 2022: 6.95%), while March 2022 IIP growth remained subdued at 1.9% (February 2022: 1.5%). The shares of the insurance behemoth LIC will start trading on Tuesday. Going by the issue price, it will make the company the fifth-largest company in the country with a valuation of nearly Rs6 lakh crore.

Only Reliance Industries (RIL), TCS, HDFC Bank and Infosys will be more valuable than LIC. Going by grey market trends where shares are exchanging hands at a steep discount of Rs25 over its issue price of Rs949, there is a good chance that the listing could be at a discount. Rainbow Children's Medicare (RCML), a multi-speciality paediatric hospital chain, made a weak stock market debut and is presently trading at an 18 per cent discount when compared to its issue price of Rs542 per share. Despite lack lustre listing of recent IPOs, coming week will witness three more IPOs opening for subscription. Zuari Agro Chemicals-backed Paradeep Phosphates IPO will open on May 17. Ethos will open for subscription on 18 May. The IPO of eMudhra Ltd, the largest licensed certifying authority for digital signatures in India, will open for subscription on May 20. Bharti Airtel, DLF, IOC, ITC, Ashok Leyland, Lupin, Dr. Reddy's Laboratories, HPCL, NTPC andBharat Forge are among the companies coming with Q4 results in next week.

Listening Post: With markets off more than 15 per cent and several stocks down almost 30-35 per cent this year so far, many investors seem to feel they have to take more risk to catch up. In fact, you should take less. In unforgiving markets, it's harder to recover from mistakes. Over the past decade or more, stocks, bonds, real estate and cryptocurrencies—just about every asset—boomed. You often got rewarded for reckless risks and, even if you got punished, rising markets helped you recover quickly from your blunders. That won't last forever. Investors generally can't get their money out daily, as they can at traditional mutual funds or exchange-traded funds. Instead, they can sell only at predetermined times, often four times a year, sometimes only twice. With many assets still near all-time highs, future returns will likely be lower, across the board, for traded and untraded investments alike. High recent returns make you feel rich, naturally leading you to extrapolate further gains. But you're just borrowing them from the future. The more highly valued your holdings are, the lower their return is likely to be down the road. The message is that the prospect of low expected returns should be taken seriously. Avoid chasing illiquid assets many of which, like private equity (PE), are no longer definitively cheap relative to publicly traded stocks. Above all, don't take bigger gambles to try catching up. Riskier holdings, such as untraded equity and bonds, had looked safe during the bull markets of the last decade. But they could deliver 'bad returns in bad times' that aren't as fleeting as early 2020. If we get rising yields (as interest rates go up), more valuations will be challenged. If you take less risk now, not more, you will be able to swing at the fat pitches when they come. Lean toward assets that can benefit from inflation. Save more, spend less. Above all, don't take big risks to try catching up.

Quote of the week: "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." — George Soros

Too many investors become obsessed with being right, even when the gains are small. Winning big and cutting your losses when you're wrong are more important than being right.


Mirroring the weakness in the underlying cash market, the derivatives segment witnessed aggressive shorting from bears. On Option front, maximum Call OI (Open Interest) is at 17000 then 16000 strike, while Maximum Put OI is at 16000 then 15500 strike. Call writers were seen adding hefty Open Interest at 16000 & 16100 strikesm while Put writers hold marginal Open Interest at 15800 strike. Implied volatility (IV) of Calls closed at 21.49 per cent, while that for Put options closed at 22.13. The Nifty VIX for the week closed at 24.27 per cent. PCR of OI for the week closed at 1.01 lower than previous week which indicates more call writing than Put writing during the week.

Option data suggests a wider trading range between 15500 to 16300 zones due to higher volatility. Traders expect markets to remain under pressure in coming week as well on back of continuous FII outflows on every rise. Below 15800 levels we could witness fresh round of selling in Nifty while 16100 levels will likely to act as strong resistance level for the index. During the week ended, nearly all the sectoral indices were in the red led by the BSE Metal and Power indices falling 13 percent each. Bucking the weak trend, the Auto index jumped 4 percent led by Tata Motors, which surged more than 10 percent, a day after it shared its March quarter earnings.Aggressive RBI and US Fed, surging dollar, imminent China slowdown and impact of Russia-Ukraine war triggering commodity price surge have all played their role in the present market selloff. Though bank stocks have been laggards in recent times, observers of the sector and contrarians advice strong buying in select banks like ICICI Bank, Canara Bank, SBI and Kotak Bank. With number of bidders for Holcim units increasing with the entry of Ultratech, industry circles expect rerating of select cement stocks.

Stay invested for present in the sector. Stock futures looking good are Colgate, Cummins India,Kotak Bank, Powergrid, PVR and RIL. Stock futures looking weak areBEL, Bandhan Bank, Canfin Homes, Escorts, HPCL, Trent and Wipro.

Cherukuri Kutumba Rao
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