In a sign of growing, but dangerous complacence among investors, markets scaled all time high on a day when the ten year Gsec yield spiked to 17 months high of 7.3%. That is not all. Market in its manic rush to breach the next barrier (on the upside of course), it seems to be ignoring all round negative news-flow. Take a look at this. Crude is at a multi-year high. Interest rates are hardening on tightening liquidity and on rising inflation risks. GST collections are on steady decline month after month. Equity FIIs are on sell mode in December. Primary market supplies (IPOs, QIPs and Offer for Sale) are on all time high. On pipeline of supply of papers from Govt.(divestment), there is no sign of slowdown. IIP numbers continue to be patchy and do not inspire confidence on the ever elusive earnings recovery.
It does not stop there. Fiscal worries have come back to haunt the bond markets. If Govt.’s latest demand for additional borrowings of 50,000 Cr is any indication, fiscal slippage could be over 30bps in the current year (fiscal deficit target of 3.2% will be breached and the actual number will be around 3.5%+). Bond markets seem to have expected this shock and factored part of this surprise with the ten year yield spiking to level not seen in the last many months.
Yet, stock market has not given up on making new highs. Where is the dis-connect?
It is not that all these negatives have sprung overnight. They have been in the making for a while. But so far, strong and surging domestic liquidity offered the counter narrative. Domestic flows were so strong that weak fundamentals did not matter much to the markets that were in a hurry to make the next highs. It may not be so any longer with early signs of trouble for liquidity as reflected by hardening rates in the short-end of the yield spectrum and rising whole sale deposit rates.
Then why markets are ignoring all warnings? Probably, this is what happens when market goes thro’ a one way run without any major blip for 12 consecutive months. To borrow from Buffett, nothing sedates rationality like the large doses of effort-less money. Market participants seem to be under serious intoxication by easy money. This is not to say that one should sell and scoot from the markets. That is not what we intend to say here. Though the long-term positive outlook is still intact, in the short-term, given the elevated valuations and emerging short-term risks, pruning positions selectively (stock specific) to build cash levels is critical to navigate the volatile times that may be in store.
Wish you a very Happy New Year!!