Markets are once again near peak levels, with just 2 per cent lower then historic highs. Since the March lows, benchmark indices have recovered a good 7 per cent. Here are 5 reasons you should be cutting your exposure to equities.
1) Markets Remain Expensive
The Sensex is trading at 24 times p/e multiples, against trailing EPS. This is as against the historic average of 17 times, we have seen in the past. Unless Sensex company earnings grow at 20 per cent next year, it is difficult to justify such high multiples.
2) Bond Yields are Rising
Bond yields are rising and rising fast. The benchmark 10-year bond yield has now risen to 7.83%, its highest since February 2016.
Consumer price index inflation stood at 4.58 percent, higher than an estimated 4.42 percent, which now raises concern of the RBI raising interest rates later next month. When bond yield rise, it pushes investors away from equities into fixed income bearing instruments.
3) Macro Situation Worsening
The macro economic situation is also worsening with rising crude prices. The current account deficit is likely to rise and the rupee has now fallen below the 68 levels. This is likely to have an impact on inflation, as fuel prices move higher.
If crude prices keep moving higher, it could be worrisome for the Indian currency and the current account deficit.
4) FPIs will Sell, if US Treasury Yields Keep Rising
Foreign Portfolio Investors have been selling heavily in the past few trading sessions. If treasury yields in the US keep rising, we will see these set of investors continuing to sell.
The US 10-year Treasury note has now moved to 3.091 per cent, north of the 3.03 percent clinched in late April. This is the highest yield since August 2011 and is not good for the stock markets. When yields rise, investors dump stocks and place money in the safe government bonds.
5) Corporate Earnings Tepid
Corporate earnings for the quarter ending March 2018 has not been too good. Massive underperformance by the banking sector is a cause for worry. Axis Bank reported losses, ICICI Bank profits halved, while Canara Bank, PNB, Union Bank, Oriental Bank of Commerce and Allahabad Bank all reported losses.
Barring the IT sector, the performance by and large has been very ordinary. It is hence difficult to justify such lofty valuations for the market.
It is better advised to trim some exposure to the market, which may have now peaked.