Equity Selloff: Much Ado About Nothing

The markets this year began with a worldwide sell off across equities. Reasons given for the sell off is of course re-rating of markets with reasons which range from China slowdown, FED rate increase to Commodity Sell off. As we will look there is Much Ado About Nothing considering there is nothing much out there what we didn’t already know. So why are the markets unnerved ? 

Lets a address these concerns in a systematic manner 

screen-shot-2016-01-27-at-4-36-32-pmChina slowdown and transition from a investment centric model to consumption driven model is well documented in financial markets. The process which began sometime back is already priced into the markets so not sure why it would be a concern now. China has to re look at the structural framework of its equity markets even if the margin lending to retail investors has come down which is a cause of concern and for more comprehensive coverage do refer my earlier report Curious Case of China Equity Markets. China’s huge debt of USD 28 tr although a real concern in China is long known and should have been already priced in macro fundamentals. Do not expect Yuan to fall a lot further considering it had appreciated a lot among its peers and the government has huge reserves which it has already used a part of it to contain the Yuan decline through intervention in currency markets.

7c1f2d3214418ab7189798ac699f2a83Energy Sell Off: Runaway Train on the Downhill. The sell off in Oil should not be seen as a dwindling demand for energy due to decease in consumption. China imported one of the largest quantities of Oil in the last month. In December China imported 33.19 million tons of oil an increase of 9.3% over the previous year. Superfluous supply of Oil globally with Iran increasing its output along with huge stockpile of oil reserves in US have dampened Oil demand. The recent downturn in Oil prices is more due to bearish trading positions and sentiment. Even if Oil price does touch USD 20 per barrel its not going to be sustainable at those prices and would jump back though by not a huge margin. Oil is no longer the valuable commodity with global power…Welcome Tesla (Chart Source: Nasdaq.com)

FED Rate Increase: This is the Real Thing

In my humble opinion all this bumble jumble is a reaction to FED increasing much
awaited rates considering everyone around the world was in a mass holiday mood with models highlighting perpetual low rates. One of the arguments against raising rates is that all the printing of cash should have alteast induced inflation in US to 2%. The writing on the wall is a proof in itself that many benefits of QE did not translate into credit off take among sectors as it should have done. QE was much over done by US and the rates should have been increased sometime back. The reaction in the equity markets is a overdone reaction of markets to dissuade Janet from further interest rate hikes which would be the right thing to do. In the end Janet has done the right thing considering US jobless rate is at all time low but things going forward are certain not going to be Utopian. Governments around the world are too much leveraged and how the deleveraging is going to be addressed remains to be seen. Its better to do sooner than postpone since the fall will be much harder. Steady and consistent should be the mantra going forward. The present carnage in equity markets especially among some economies was long overdue. In the end if FED had not increased the rates and had waited to do so in February hypothetically, the present scenario would have got delayed and unfolded then in a very similar fashion. So Much Ado About Nothing…

12509540_1064612603560294_8853170839149345007_nThe world still has not learnt its lessons to live within its means. A savings glut in terms of very high savings rate in Asian economies with very low savings rate in Developed economies will always cause bubbles. Its time that people in some developed countries who are habitual to take Four holidays on an average per year cut down their holidays to three or two and become more productive. (the example cited is to highlight excess spending and is not an attempt to criticize a particular behavior)  Globally countries especially those in Europe need to identify their own growth drivers rather than depend on others to generate growth for them.Its surely time for US to invest a lot on its ailing infrastructure especially railway network which needs a complete overhauling compared to other developed economies. A non existent of high speed railway system in US is a great indication how much investment needs to be judiciously induced into infrastructure projects rather than asset markets. This will boost productivity for US over the long term while generating lot of jobs over the short term. Elon Musk has done well but world cannot depend on a few Mavericks.

So Dude what ahead?

India

India structurally is one of the best markets in the world at present. Driven primarily by consumption, a renewed focus on attracting FDI in captive sector backed by a rising wave of entrepreneurship exuberance and innovative technology would propel India to stellar heights. Its a great opportunity to take steepered approach to invest in many emerging economies especially India. India is going through a positive paradigm change under Mr Modi’s government and the results of FDI will kick in with the next couple of years. This is a great time to invest into Indian Equities especially in broader Large Caps although volatility is going to persist in the market for sometime going forward and its difficult to predict the bottom of the market. The VIX index also known as risk index measures volatility going forward in equity markets is high at 20.8. The volatility in Indian markets is not due to India macro fundamentals but due to the global meltdown and therefore transient in nature.

VIXThis a very good time to invest either broadly through mutual funds for passive investors with an investment horizon of 2 years in dividend option. Surely no surprises if the run up in Indian equities is very fast and you could miss a good opportunity to buy. Well informed active investors could who have a high risk taking appetite could actively invest directly in undervalued stocks over shorter duration or play in equity options or futures. Considering high VIX measure which in turns means high implied volatility will lead to higher rewards but then also wipe out your money if bet goes wrong. But pundits out there time to take a bet but investors beware. Its going to be rough for next few days.  

Chart Source: NSEIndia.com