The markets are up by around 20% for this year. Economic growth has been muted amidst strong macros like a stable currency, low inflation, low interest rates and comfortable government finances. Many think markets are in a bubble zone. Really? bubble zone when markets are up just 25% over the last 3 years. Its the most ridiculous of assertions.
Overall the markets are still well placed with strong macros and decent global market outlook. Everyday as I read articles on the internet and in newspapers I am extremely intrigued with the immense negativity and calls for a big market fall. Not only Hedge fund managers but also Wall Street Bankers have turned wary. This is a very unique occurance as normally the SELL SIDE as it is called is most Euphoric at the top of the market. This psychology clearly indicates to me that the market top is nowhere near.
That then leads us to the next question. Will the markets never correct? Ofcourse not, markets will correct and they will find a reason to do so. The only reason that I can see at this stage is the North Korea issue where both sides are unwilling to back down atleast publically. However even in Doklam the same thing happened where both sides stuck to aggressive positions till just a day before the truce was called. That said I do not seek to be an expert on this subject. But I do not know how to play the event. Aggressive posturing could continue for months or things could become uncertain very fast if Kim Jong Un actually decides to fire missiles near to Guam. The only way to hedge the portfolio from this risk is to either go aggressively into cash which is something I am not inclined towards or hedge by buying near market NIFTY Put Options where the hedging cost, lets say for a 9800 put option when the markets are at 9875 is around 0.8% for the month of September. Possibly it is worth it. However I am not personally inclined to do so.
Statistically in bull markets the probability of two consecutive negative months is around 10%. Historically at most times there is one negative month after a few positive months. As such the probability of a negative September is just 10%.
Directionally things are positive. The second half of the year should see a good economic revival as uncertainties of GST fall behind and we enter the third quarter which last year was hit by demonetization. Monsoons have been decent post revival and should keep food price in check after a seasonal uptick in the near term. Global metal price rally could impact inflation going forward although Crude Oil prices still remain subdued. Global Economic revival also is well on way and with subdued inflation is positive for stock markets globally.
As I have pointed out earlier, my view on the second half of the calendar year 2017 was for subdued returns. The next 4 months could be very ranged as the markets will set up for stronger returns in the year 2018. Many global markets are looking overbought in the short run and a global correction will impact our markets too. Stock specific opportunities however will continue to be in aplenty given low interest rates and a reviving economy during the second half of this financial year and that is where money will be made. The big theme for 2018 is Mid Cap Construction companies with strong order books where past Balance Sheet issues have been resolved. We will participate in this them one way or the other. 2018 should be a 20% plus year for the markets in terms of returns and that is what we will be ready for as we navigate some volatility in the near term.
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