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The pendulum has swung! - Alpha Edge, March 2018

You know the street signs that grab your attention on the road and appropriately lead you to take caution? Multiple signs, similar to the ones mentioned above, have been reminding us of the dangerous curves ahead in the equity markets. We experienced an eventful February full of critical announcements and news flows ensuring the return of volatility as global markets, including India, retreated.

In the month of January, we released our Alpha Edge report titled ‘Remember the pendulum’, where we highlighted the prospects of change in market direction and correlated it to the movement of a pendulum. Our view still remains the same, that we are likely to see sustained periods of volatility ahead. Now, the pendulum seems to have swung.

Globally, markets were broadly weaker in February. Higher-than-expected US wage data initially put the bond markets under pressure - as investors priced in the potential for a more proactive Federal Reserve - before worries spread to equity markets. Rising rates, inflation and talks of trade wars have caused market participants to re-evaluate their views on the overall state of markets.

Indian equity markets underperformed their emerging market peers in February. Domestically, markets have become increasingly reactive to news flows, which were probably ignored earlier. Another major development has come from the banking sector where an alleged fraud at state-controlled Punjab National Bank has raised concern over the wider sector. Over the last year, even though India has been a part of the global markets rally, it has not really been a part of the global economic recovery. This has led to valuations stretching to near historic levels. The latest earnings season and high-frequency indicators are suggesting some bit of recovery finally being underway. However, the higher expectations built around the recovery over the last three years pushed the valuations to the extent that has left little or no room for further price appreciation.

Higher inflation, domestic rate hike fears, fiscal slippage, political uncertainty and the upward movement of global bond yields, will continue to act as an overhang on multiples. 
Hence, we continue to retain our cautious stance on equities from a short-term point of view.

 

Click here to read the report

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