US-China trade war tensions are rattling the global markets while expectations of a coalition government coming at the Centre in India are making the Indian stock markets nervous like a kitten. From a global perspective, even though a full blown trade war seems unlikely, but here in India the present government scraping through the majority mark is gathering steam in speculative circles and hence the stock markets have gone up nicely in the last three trading days. The US and China are significantly raising import duties on each other’s products and in international commerce parlance, trade war means increasing import duties by trading partners. This will have a bearing on all stock markets around the world, with growth slowing down a major concern for market men. Foreign Financial Institutional investors usually track the Morgan Stanley Capital International (MSCI) Emerging Markets Index for their allocation and weightage against each country to buy and sell stocks. The index was developed in 2001 to capture the large and mid cap representation across 24 emerging markets countries out of a total 96 countries. The index covers approximately 85% of the free float adjusted market capitalisation in each country. Since the MSCI Emerging Market index gives specific weight to different countries, hence many active and passive funds around the world take a similar allocation to the MSCI emerging market index. Any decrease in the weight of a country in the MSCI emerging markets index can create a major impact on the stock market and individual stock portfolio allocation percentage. There has been news that the India FII weight in the MSCI emerging market index might decrease from the present 8.47% to proposed 8.20% levels in the next nine months. Interestingly this comes on the back of China weight expected to go up in the MSCI emerging market index against our weight getting reduced over time. Hence, there could be selling by the foreign institutional investors in certain large cap stocks to realign with the weightage percentage of the MSCI emerging market index. This throws up good opportunities for investors to gather their favourite large cap company stocks at regular intervals when there is selling by foreign institutional players during the course of this year. The election results on 23 May will put all speculation to rest in terms of the new government at the Centre and the direction of our stock markets. Any adverse results can propel the markets to go down and vice versa. Even in these uncertain times, there are still ways to find compelling investment opportunities like investing in Services focused stocks. Services companies are less exposed to trade policies than other industry related companies. There is also a silver lining as many Indian analysts and trade experts expect the US-China trade war to become a blessing in disguise for Indian exports. In fact, there are huge opportunities for India to enhance its exports significantly, especially in the information and communication technology and automotive sectors. We feel that stock markets are going to be extremely volatile in this calendar year and hence stocks related to IT companies can be purchased by investors. Select IT companies like TCS and Infosys with a dash of HCL Tech can be accumulated by investors in small quantities over the next few weeks.

Rajiv Kapoor is a share broker,  certified mutual fund expert and MDRT insurance agent.

 

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