The Sensex and the Nifty have lost nearly 7 per cent from their recent highs. Analysts advocate a buy on dips strategy. However, even at these levels the markets look expensive and it would be best to wait for further declines. Here are some reasons for the same.
Interest rates are set to rise
Interest rates in India are set to rise. The 10-year government security has surged to 7.56 per cent currently from 6.41 per cent about eight months ago in July 2017. Now, this is not good news for stock market investors. It is a clear sign that interest rates are headed higher.
When interest rates rise, stock prices tend to move lower as investors prefer to take shelter in safe debt instruments. This is not an Indian phenomenon. In the US, bond yields hit 2.87 per cent, which led to a sharp drop in the Dow Jones. In fact, that index has lost 10 per cent on rising yields.
It is highly possible that bond yields would continue to spike.
Indian markets are overvalued and trade at a premium to most global markets. In fact, they have slid just about 7 per cent, when compared to global markets where the fall has been almost 10 per cent.
At a trailing p/e of 24.23 times on the Sensex, this market is overvalued by a distance, though most analysts fail to admit it.
In fact, most analysts will never admit the same, given that most of them have either their own money invested or those of investors whom they act on behalf.
Another drop of around 10 per cent on the indices should make the markets reasonably valued.
Inflation a real threat
While the "buy on dips" brigade would want you to buy on every dip, it may not be a good idea. In fact, it would be good idea to sell on rallies, as inflation would ensure that there is pressure on interest rates.
In fact, the RBI has flagged-off inflation concerns as a big risk. If they are now prompted to hike interest rates, it could only lead to the market falling even further. Hence, a good strategy would be a bottoms-up approach to investing.
A level of 32,000 on the Sensex would be neither expensive nor cheap. So, wait for those declined before buying.
Global markets continue to be in a spot of bother over rising yields. This may continue for some more time, given the way markets have gone higher.
Also, the Long Term Capital Gains (LTCG) levied on shares may lead to selling pressure till March 31, 2018.
It maybe recalled that Finance Minister Arun Jaitley had levied a 10 per cent LTCG on shares in Union Budget 2018. This would be effective from April 1. This means we could see some selling pressure until March 31, 2018.