Murray Gunn, Head of Technical Analysis for Global Banking Giant HSBC went on record last month stating that his team is issuing a red alert when it comes to global equities. Gunn believes that the Dow is showing similar signs as it did right before the crash of 1987: the infamous “Black Monday” when the index crashed over 22 per cent in a single day, wiping out $ 500 Billion in US investor wealth. Gunn’s evaluation is largely based on the trusty Elliot Wave theory of technical analysis.
The OECD (Organization for Economic Co-operation and Development) recently lowered its 2016 global economic growth forecast to 2.9 per cent from 3 per cent, with a fairly pessimistic view for 2017; further bolstering Gunn’s hypothesis from a fundamental viewpoint. It’s a known fact the U.S GDP growth is slowing down too. Add to that the uncertainty surrounding the Trump agenda and the fact that the US markets are overvalued at nearly 24X earnings, and the alarm bells just ring louder. China’s burgeoning debt has many experts predicting a severe correction there too.
Closer home, India remains on a relatively strong footing. Capacity utilization is likely to rise over the next couple of years, leading to earnings growth. The short-term negatives of demonetisation will probably pave the way for lower interest rates and a ‘V-shaped recovery’ after a few painful quarters.
Having said that, it’s hard to ignore that the NIFTY has already witnessed a fair rise this year – it’s up nearly 15 per cent since February. As a result, the current P/E ratio of the NIFTY already stands at 21X, and that’s not cheap.
The Indian IIP (Index of Industrial Production) went up only marginally by 0.7 per cent in September, following two straight drops in August and July. Counterintuitively, our GDP growth is likely to be under stress for the remainder of the Financial Year as our economy successfully absorbs the shock of the demonetisation. Economic Growth (as indicated by IIP and GDP Growth), Inflation and Interest Rates are some of the key parameters that catalyse FII flows into a given market at a given point in time.
The US, by far, tops the list of FII’s that pump money into India. It would be akin to living in a fool’s paradise to assume that a global sell off or a general ‘risk-off’ attitude in the worldwide equity markets wouldn’t lead to moderate-to-severe collateral damage on the Indian markets in the medium term, domestic strength notwithstanding.
Given the multitude of variables in play right now, investors should re-evaluate their asset allocations while considering their risk profiles. If you’re overweight into equities, take a step back and switch moneys into medium term debt funds and credit opportunities funds for the next year. If you’re underweight into equities, use sharp corrections over the coming quarters as entry points into the markets. A 50:50 split between debt and equity assets is ideal for a three to five-year horizon.
Equity Mutual Fund SIP investors should continue running their long-term SIPs'. If a correction were to come, it would in fact represent a fantastic opportunity for unit accumulation at depressed prices. However, a rebalancing of the lump sum moneys already accumulated through the SIP’s is most definitely in order.
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