Earlier in March, we brought your attention to the multiple signs of the dangerous curves ahead in Equity markets. March turned to be just that. An action-packed month that started with Mr. Trump’s Trade war announcement followed by CBI taking noticeable action against fraudulent banks. We also the U.S. Fed raising interest rates while the Bank of Japan’s chief hinted at a possible exit from its ‘ultra-easy’ policies. These events have led to an increase in volatility and have caused the markets to continue their downtrend after the swift fall in February.
We presently believe that the current breather is probably a first pit “The First pit stop” to further lower levels during the year ahead. This pause will help participants to evaluate the changing trade dynamics and likely perception of investors, domestically and globally.
Globally, US-China trade war needs to be closely watched as China has hit back, though mildly, through a US $ 3 bn tariff. The move may not look significant prima facie, but is effective as it aims to hit The President’s voter base, namely the farmers. If the tensions between these two giants escalate, we surely can see a lot of collateral damage globally. But that is a big if, considering that all Governments know the fragile states of their economies.
Its likely that global trade has slowed down in the last quarter, which can be interpreted by Baltic Dry Index that has dropped more than 40% since mid-December. This index is reported around the world as a proxy for general shipping trade which symbolizes the epicenter of global trade, that of movement of basic raw materials.
On the domestic front, apart from the global worries, asset quality issues for Public sector banks have only deepened, coinciding with political uncertainty from impending elections, deteriorating trade balance due to higher oil prices and deteriorating fiscal policy environment. These key concerns need to be meticulously observed.
We have seen a reasonable correction in the last two months, but the valuations are still high and are some distance away from being called as fairly valued. The recovery in earnings is very critical for such rich valuations to sustain. Hence, we continue to retain our cautious stance on Equities and suggest measured exposure towards them if at all.
Happy navigating the many pit stops that lie ahead this year. Strict adherence to asset allocation is the only way out.