Re-fueling volatility Wealth Edge, May 2018

In the March edition of our newsletter, we shed light on the multiple signs of the potential dangerous curves ahead in the equity markets, and in April about the breather in the form of a market rally which would probably be ‘The First Pit Stop’. Accordingly, post the correction seen in March, markets recovered in April. We believe that the factors such as a strong dollar, impending global trade wars, hardening of the US bond yields and a resilient Oil will ‘Re-fuel volatility’ in the days to come.

Globally, Oil prices gained, and may continue to do so as the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC countries are likely to continue with output cuts until inventories return to their normal levels. Oil supply disruption in an increasingly hostile environment in Venezuela also contributed to the price movement. Higher commodity prices had elevated concerns on inflation while the 10-year US treasury rate is hovering near 3%. Further, trade friction and sanctions by the US could lead to higher prices not only for oil and metals, but at some stage other goods that are hit with tariffs too. This has led to a cautious stance from the FIIs towards Emerging markets and therefore EM currencies in general have witnessed increasing pressure.

On the domestic front, India’s Trade deficit widened to a 5 year high. For a net oil importing county like India, a sustained rise in crude oil price would have adverse macroeconomic implications. Higher oil prices will weaken the economic growth, push up inflation and deteriorate the twin deficits (current account deficit and fiscal deficit). This may have an adverse impact on the Indian G-Sec yields. Rising commodity prices and cost of capital will add pressure on margins of Indian corporates.

The Q4 FY17-18 result season hasn’t been encouraging so far. We will have to wait and watch for the entire earnings season to unfold to have a concrete conclusion. However, we believe there is scope for valuations to rationalise. The current risk-reward ratio seems to be unfavourable for equities from a shorter-term perspective, while the earnings in the medium term are expected to be good. The outcome of the Karnataka elections is another key event which will have to be closely observed and its impact assessed.

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