It was mayhem across the Indian stock markets, with Friday seeing the seventh largest fall ever on the Sensex. Almost Rs 4.5 lakh crores investor wealth was destroyed and looks like more is coming. You rarely see the Sensex falling 840 points in a day. Let us tell you 5 reasons to sell stocks now.
Indian markets are highly over valued
Valuations of Indian markets are so frothy, one mutual fund wound-up two of its schemes fearing that it was not going to be able to deploy money because of overvaluations. When you have the Sensex at 25 times trailing EPS, against the long term average of 17 times, you need to be careful.
A day before the Union Budget, Arvind Subramanian, the Chief Economic Advisor suggested caution. "If small savers are hurt, then the government will have to step in and God knows what kind of additional distortions that can introduce. We need to be very watchful this time around."
The government may have realized this fact, which is why it may have levied Long Term Capital Gains Tax.
Bond yields are rising
When bond yield rise, investors are likely to start moving away money from equity to debt. The simple logic is interest rates are going higher and equity valuations are stretched.
So, instead of deploying more money at higher levels without capital protection, it makes sense to deploy money into debt with yields rising. What is assured is that at least your capital is protected and you earn something in returns.
Valuations at the moment are rich and the only way to make money in stocks is "buy low" and "sell high". So as bond yields rise individuals may park money into debt and wait for another fall in the markets to buy.
Inflows into mutual funds may slow
Mutual Funds which led the rally and the Sensex to a historic peak, may see inflows slowdown or even reverse. The government has levied a tax on the distributed income of equity mutual funds. This means to pay a 10 per cent tax, they would lower your returns by a similar amount.
With no goodies for the middle class in the Union Budget, the disposable income is unlikely to go higher and hence the money into stocks is likely to reduce.
Global markets may soon see a sell-off
We have seen the Dow Jones retreating sharply on Friday, as bond yields there spiked. The Dow Jones and the S&P 500 have been constantly breaching new records and at some stage that is likely to stop.
The yield on the benchmark 10-year Treasury notes was higher at 2.83 percent . If it gets anywhere closer to that 3 per cent mark, be rest assured the US markets could fall.
This could trigger a wave of selling across the global markets, which could also see Indian markets fall.
Worries over inflation and interest rate hikes
The Reserve Bank of India may hike interest rates as inflation rears its head. Already crude is showing signs of rallying, which could put pressure on inflation.
In fact, it would not be a surprise to see the RBI hike interest rates for the first time in many years. So, this would not be good news for the Indian markets.