Grab the Good and Ignore the Bad!

Markets are in no mood to get swayed by the bad news. For them, bad news is no news in the current bullish tone, while good news is great news. Look at how markets have reacted to not-so-good news of strong job numbers coming from US. It has strengthened the case for rate hikes in US sometime this year. That hasn’t spooked the market yet. Neither the fading chances of rate cuts in India, given the stubborn inflationary outlook for the rest of the year.

That said, some early signs of caution are visible though. Drifting FII flows over last few sessions and increased selling by domestic investors have dampened the mood a bit, though underlying tone continues to be bullish. FII flows have sharply come down from around $1.7Bn+ in July to just over a billion in August. With all positives like GST, monsoon and earnings upgrade already priced in, markets will find it difficult to continue the momentum esp. when support from FII flows has abated.

Though India story has strengthened with impressive policy actions from Govt. and improved corporate earnings outlook, Indian markets are vulnerable for the eventual turn of short-term liquidity that has been driving rallies across EM asset classes as well as developed markets. Rarely have all asset classes rallied in symmetrical fashion as we  see now across global bonds and equities. Market’s bet on short-term liquidity have distorted the valuations deviously across markets. It will not be a surprise if the rally continues and tests the patience of long-term investors. But when it ends, it is likely to be ugly, timing of which is difficult to predict though. Given such a setting, it is time to take risk off the table gradually by pruning profitable positions and by raising cash levels to capitalize on the eventual correction. The collateral damage that is likely to happen in Indian markets will provide a huge buying opportunity given the strengthening long-term outlook for earnings and for policy actions.