Transcript of Podcast
Hi I am Arjun Parthasarathy speaking and this podcast is on “Caution is always good, especially when markets are uni directional”
The strong rally in equities and bonds post Brexit has caught many investors by surprise and questions are being asked on whether the rally will continue or not. US equities are at record highs even as treasury yields are trading at close to record lows while equity indices in many countries across the globe have jumped from lows with bond yields falling to record lows. The Sensex and Nifty have seen a rally of close to 6% from post Brexit lows to trade at one year highs while the ten year gsec yield has fallen by 24bps to trade at three year lows.
Will the rally in equities and bonds continue? Should you throw caution to the winds and jump in headlong into the rally or should you be cautious in this market?
On the question of “ will this rally in equities and bonds continue?” the answer is yes, it will continue. The reason the rally will continue is that global central banks, except for the Fed, will keep policy rates at record lows even as they pump in high liquidity into the markets through asset purchases. Brexit has caused a shadow on global economic outlook and that will prompt central banks to keep policy ultra accommodative. The Fed too will be extremely cautious in its rate hikes.
Economic data too is coming out positive for the US while data has not been too negative for China and the Eurozone. Read our global economic data analysis for July 2016 for more information on latest data release.
India is also seeing many positives appearing on the horizon. There is optimism on the key indirect tax reform of GST being passed in this parliament session. Tax collections for the first quarter have grown over 25% leading to reduced concerns on fiscal deficit. Corporate results for the first quarter of FY 17 have been mixed but have not been deeply concerning and management of companies in a few sectors have been exuding confidence on growth. Monsoons have been on track adding to business and consumer sentiment.
However despite the fact that the rally in equities and bonds could continue, it makes sense to be cautious. Cautious does not mean shunning the rally but it means looking ahead over a longer term period rather than a near term rally. Invest based on your understanding of the markets and based on your ability to withstand volatility. It is easy to get carried away in such uni directional markets and when it turns, usually suddenly, you may be caught with investments that you never wanted in the first place.
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