Death, Taxes and Corrections!

“Benjamin Franklin famously quoted once, that only two things are certain in life – Death and Taxes!

We added the third one – “Market Corrections”.

While we are not the ones to be swayed by volatility or market corrections. We still feel the need to write about it.

Somehow, stars are aligning for a short-term check on market exuberance.

1. US 10-year yields: US 10-year yields have topped 5% making a 17-year high. A healthy gap between Indian 10-year and US 10-year yields has always been in the range of 3-5%. It’s currently at an abysmal low of 2.5%. For an FII investor, the favored and safe trade right now is to go back to the US and invest in the world’s safest instrument i.e. US Treasury with an attractive running yield, the prospect of strengthening currency, and a high probability of capital appreciation in 1-2 year as the rate cycle reverses. For sure, the odds for FII flows are stacked against India right now.

2. Geo-politics: The Israel-Hamas conflict erupting beyond normal proportions could lead to disruptions in oil markets and global supply chains. While geo-political disruptions are nothing new and chances of this one escalating to other countries are low, we are still getting short-term jittery on this. Simply because this is yet simmering and hasn’t erupted in full scale. The world is still awaiting how Israel is going to mount its ground offensive and the counter-offensive (if any) from the Arab world thereof. We believe the first 7-10 days following Israel’s ground offensive will be extremely crucial and could lead to risk-off trade globally.

3. Gold: Gold is making all the right noises for the wrong reasons. Gold seems to be gaining center-stage of conversations and there is a strong undertone of strength on the yellow metal off-late. This is again indicating a risk-off from Equity and a quest for haven globally.

4. Oil and India: Our relationship with Oil is a well-documented one and need not be over-emphasized. At 90$/barrel, we are bleeding chips and if Oil shoots past the 100 mark, we will have no hiding places. Our CAD (current account deficit) deteriorates by 0.5% with every 10$ rise in Crude prices.

To counter this all, we have had our domestic arsenal in the armor. And to date, they have been fairly effective. Macro numbers, and corporate earnings, well supported by robust domestic flows, have built a strong case for equities in India. SIP flow itself is now about $2Bn every month lending much-needed support to the market. And with inflation cooling off gradually, the Central Bank seems content with maintaining the status quo on rates. 10-year GOI Bond yields though have shot up from a low of 6.9% to 7.4% in the last 3 odd months, but then yields were at this level in Feb-March’23 also. So, unless we see a dramatic spike in yields, we don’t foresee much of a risk on the domestic narrative. Largely, the India story continues, just that the global environment has significantly worsened.

We are still hopeful, that geo-political tensions will not become a raging war with multiple countries involved in it. However, the situation will turn worse before it becomes better. Hence, we are tempted to give a cautionary short-term note.

What should one do:

  • If you are a long-term investor with a 3-year+ view, these are small hiccups and should not disrupt your process at all.
  • If you are sitting on cash, waiting for an opportune moment, the next few weeks might give you an entry point. Be ready with your deployment plans.
  • If you are a short-term trader, then tread and trade with caution.

What pockets should one consider:

  • Mid and Small caps have rallied phenomenally for the last 1 year or so.
  • In comparison, broader index and large caps have been clear laggards.
  • 60% of Nifty 100 companies have delivered negative or low single-digit returns for the last 1-2 years.
  • It’s time to place your trust in the best and go large in Large Caps.
  • This approach also makes the portfolio less volatile and more resilient from corrections.

History testifies enough that all geo-political situations have short-lived impacts on markets but they do have one. This one will be no different. Bounceback in markets is equally strong and sudden, so one can’t be caught on the wrong foot on this one. It’s better to swim it through rather than trying to escape the tide.

Short-term market calls are not our forte and we have always refrained from giving a short-term view. We are just bracing up our investors that before the light of Diwali illuminates our portfolios again, there could be a lull of darkness.

With heartfelt greetings for a warm festive season, here’s wishing all our investors a safe and prosperous investing journey ahead!