The current week was another extraordinary one for the Indian Markets with the markets rallying further largely driven by retail investor flows. Globally markets were mixed with most markets showing selloffs and then bounce backs. The weeks started off with huge concerns around the Evergrande Crisis in China which was touted as a “Lehman Moment” for China and the US Fed Policy announcement and ended with investors and traders largely discounting these news flows.

The US Fed Policy was clearly more hawkish than expected with indications that the bond buying will be wound up very fast over the next 6-8 weeks and might be followed up quicky by interest rate hikes. It is very clear that inflation is not “Transitory” as has been touted by most central banks. Multiyear high commodity prices cannot be said to be transitory. Given that the US Fed is currently buying $ 120 billion per month the winding up will be disruptive for sure. It cannot be as smooth as what the markets believe. A large part of the subdued value of the bond yields has been due to the buying by central banks. Once this gets wound up and high deficits still continue bond yields will have a propensity to rise. Remember real rates are hugely negative in most parts of the world today which has its own risks for financial stability in the long run.

The Evergrande Crisis is very tough to evaluate as is everything else that happens in China. In my view it cannot be correlated with Lehman unless there is some fraud and diversion of money. Finally Evergrande has real assets where the actual value might be lower than what they own to creditors, however the exact amounts will be tough to estimate. So my guess is if this is a standalone company issue the Chinese authorities will handle it. However if it is a systemwide real estate issue given the multidecade boom in real estate with huge empty properties and under utilized infrastructure assets then the impact will be wider. The probability of this happening is quite strong. Overall the Chinese economy is slowing down very rapidly which might impact the global demand of many commodities including consumer goods across the board. Economic data from China will be important to monitor over the next few months.

In India the biggest news that came out was the Zee Sony merger announcement which led to a huge continued rally in Zee Entertainment stock and is good for minority shareholders who get an exit at much higher prices than were expected till last year. The Freshworks listing in the US Markets also created a strong buzz and technology stocks rallied end of the week following Accenture’s results. However IT Stock valuations are now much higher than historic valuations. It will be interesting to see the margin picture of IT Company results next month as results come out. Growth outlook is strong but margin picture is also challenging given a huge pressure on wage inflation.

Direct tax data is moving well which is good from the standpoint of government spending which has been subdued this year. Overall the Covid wave also seems to be stabilizing with no new variant coming up for months now. It now seems that with the huge growth in vaccination numbers combined with no new variant we might be able to avoid a new wave of Covid. However its clearly unpredictable and we need to keep our fingers crossed.

The biggest concern continues to be inflation and the impact that will have on consumer demand. Although CPI Inflation numbers of India came out to be lower than expectations they clearly do not reflect the real inflation on the ground. Erratic monsoons with subdued rains in July and August has also impacted agriculture productivity though rains picked up substantially in September. This quarter will be the first quarter where we will see a real year on year comparison which is proper and results of this quarter will give us an idea on the actual growth numbers of many companies.

In the meantime the NIFTY reached near 18000 and the Sensex hit 60000 levels this week. The move in the Indian Markets has been incredible with a complete lack of correlation of India with world or emerging markets. Markets look very frothy with retail traders believing the markets cannot correct. Valuations are now the highest since the year 2007 and Market Capitalization to GDP has crossed 135%. As such near term risk reward has become even more unfavorable than what it was at the beginning of the month. Bull Market sell offs come suddenly and are deep and sharp and take out the weak hands. It makes sense to generate and hold cash in a strong market to buy in when markets sell off and everyone tries to push the exit button.