At the onset of this Calendar Year, we released our Alpha Edge report titled 'Remember the pendulum’, where the prospects of a change in the market direction were highlighted, attributable to stretched valuations. A change in market direction was indeed witnessed as the markets failed to justify those stretched valuations. Nine months on, our view still remains the same as we are likely to witness sustained periods of volatility ahead.
In the month of September, Equity investors hit the caution button after the initial sell-off in a majority of stocks in financials, auto, and consumer sector. The trend reversal was triggered due to a prominent infrastructure development and finance company failing on multiple debt repayments which accentuated liquidity concerns and caused Nifty to pare by ~6.42%.
Another major underlying factor for the increased volatility was the deteriorating macro environment as twin deficit worries amplified due to the swift upward movement in Oil prices. We do expect the oil prices to remain elevated because of the compressed Oil supply and the looming sanctions on Iran. As Winter approaches, we may see the demand for Oil march further northward. If this leads to Oil moving closer to the $90 per barrel mark, we can expect another bout of volatility. So, ‘Brace yourself … Winter is coming!’
On the global front, growth data continues to diverge as the US remains robust while Europe continues to stare at a slow-down. Trade tariff actions are intensifying, which is leading to GDP downgrades for China and weakening of EM assets in general.
In India, the macro outlook remains bleak on the back of higher oil prices, trade deficit and inflation fears. The bond and equity markets are nervous as a result of these developments. We continue to believe that equity markets will witness volatility for the next couple of quarters because of rising commodity prices, tightening liquidity, weakening currency and political uncertainty.
The risk-reward ratio continues to be unfavourable for equities in the short term and we remain cautious on equities. Any exposure towards equities shall be done in a gradual manner.
We continue with our cautious stance on the fixed income space due to a weakening currency, elevated commodity prices, and fiscal pressures. Investments in Short-term and Accrual funds are recommended. Credit risk funds should be avoided as widening credit spreads indicate growing concern about the ability of corporate borrowers to service their debt.
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