When will the correction come?
Date:07/03/2021
I can’t predict but I can be prepared.
For us the broad construct for the stock market rally for India was mainly liquidity followed by India specific reasons, since we acknowledge the fact that liquidity is the mother of all bull markets. Its only under such circumstance that most of market participants make money. For India we give significant importance to 3 things :
INR/USD below 76
Crude Oil below 65/70
10 Yrs US treasury yield below 2/2.5 percent
Whenever any of these are challenged we may see correction and when all of these are challenged mostly we may see a euphoric end to the rally in equities. Of course our country’s health in terms of fiscal, monetary, USD reserves, Debt etc will determine whether we remain investible for future or not. Central Banks world over may not be over with their arsenal and there can be new reasons for equity rallies to sustain even during that time, but broadly whenever the risk free assets start yielding good returns people start re looking their asset allocation strategy.
As we stand today one of them is challenged i.e Brent crude at 69$ and other is questioned i.e US 10 year paper spiked to 1.6% last week and cooled to 1.45 ish. {This is perfect set up for correction and I will be surprised if we don’t get one}. Looking at metal prices and the data of savings that households have amassed in western world due to government support, inflation is going to be a big beast difficult to manage in coming years and we will definitely breach 2% yield also in future. However until major parts of developed and developing world is not properly vaccinated and economies are not back on growth track federal banks world over are helpless but to keep monetary and fiscal policies lose and see the asset inflation rise…. tight lipped.
But is it end of road for equities?
Frankly speaking we are equally surprised as you are with the pace with which equities have moved world over and also scared to take any new meaningful positions at this juncture but it is not clearly end of road for equities and not for India at least. However if we see meaningful pull back of money by Federal banks and if tap for cheap money stops flowing for India in this calendar year itself we may see bigger jerks, but the probability of that happening is grim. Also in last budget Government has for 1st time outlined realistically our revenue collections and they seems to be making every attempt to cut on inefficient capital allocation ( selling some PSU, giving VRS’s ,privatizing etc )and put that money to use on creating productive capital ( infrastructure ) which can set the growth back on track and ensure it keeps rolling for many years.If growth comes back we may also have private capex cycle coming back in few months. India is lot less levered than most of the countries of our size and even though we have poor investment ratings , thanks to MOODY’s and S&P we still attract a lot of serious capital and now at really reasonable rates. Mr Prime Minister’s visit to various parts of the world has given a good face to India and post this pandemic we have garnered a lot of respect from globe. Many of us may not know the fact that we have 60% of global vaccination facility as of today, and if we all co operate India can get vaccinated in just 4/5 months , we have also started sending such vaccines to globe. Global Giants in debt and equity like Oak Tree, Bridgewater have started taking interest in India. Indian corporates are very less
levered than last decade and NPA cycle in Indian Banks have just started to get reverse for good. These are giant changes and cannot fizzle out in hurry, so dips in India should be welcomed, of course any correction comes with strong reason and always questions the investment thesis, but our understanding is one who keeps his cool during such periods, shows his courage to invest and keeps his asset allocation discipline….. gains a lot in the end.
Disclaimer: This is an informative document and opinions expressed in it are our own and not any advice. We are certified investment advisors yet to be SEBI registered. We are AMFI registered MUTUAL FUND DISTRIBUTOR.
