I was too bored to write on the Union Budget with a plethora of analysis available to everyone and also the fact that most of the things were analyzed threadbare by each and every one and in general the budget was taken as neutral to negative. The key figure that most disbelieve is the Fiscal Deficit figure and the allocation for subsidies given that fuel subsidies on a run rate basis at the current prices of subsidized fuel run at around Rs 6-7000 crores per month to the government and it looks difficult that the figure of Rs 43000 Cr will be acheived. However there are lot of under forecast revenue figures too, like those of disinvestment as well as other non tax revenues. In anycase the budget has no long term impact on the markets and as such if one has a chance one could just sleep through it, however since we are supposed to give views we have to do so.
The bigger story for global equity markets is likely to be more of reallocation from bonds to equities. Over the last 4 years, from 2008 nearly USD 480 billion has flown into bond funds and just around USD 48 billion into equities. Out of this USD 48 billion also nearly half has come from the beginning of this year. Typically bond market reversal cycles are long term in nature and at one stage last for several months. I believe that such a trend reversal is happening today.
The bigger story for global equity markets is likely to be more of reallocation from bonds to equities. Over the last 4 years, from 2008 nearly USD 480 billion has flown into bond funds and just around USD 48 billion into equities. Out of this USD 48 billion also nearly half has come from the beginning of this year. Typically bond market reversal cycles are long term in nature and at one stage last for several months. I believe that such a trend reversal is happening today.
In an increasingly globalized world the direction of global flows is more important to evaluate rather than pure domestic factors. The impact of domestic factors is largely on determining whether the markets will underperform or outperform. We have seen that the Indian markets have corrected nearly 6-7% from their peak levels where some other markets like korea, Indonesia, brazil, mexico are near their peaks for the year or a couple of percentage points lower.
Typically the global liquidity flows either happen into risky or risk aversion assets. The two major risk aversion assets globally at this point of time are the US Treasuries and German Bunds. Over the last couple of weeks as uncertainties on Greece have gone into the backburner and news flow from the US economy has been positive we have seen some shift start out of these two assets. Typically the directional change in bond markets lasts several weeks and months. In the attached graphs I have given the returns that the markets gave over the last two reversal cycles. In my view the reversal cycle of bonds has just started and the rally in equity markets still has some way to go as the flow into risky assets will pick up as bonds get sold off.
The two charts attached with this article explain this more clearly where reversal of bund and US Bond yields has just started.
The first chart is of German Bunds where the bunds have broken out of the upward sloping trendline and is showing a trend reversal similar to the two other times marked on the chart. Each of these bund sell offs have been accompanies by significant rally in the German DAX as well as global markets.
Similarly the second US Bonds yield chart shows that sell off in Treasuries which leads to increase in bond yields typically leads to shift of money into equities and sharp rallies.
Global equity markets as such are positioned for further upmoves over the next two to three months.