On Friday, the Dow Jones fell a huge 460 points, while the European markets tumbled near 2 per cent, as growth worries came back to haunt the global markets. The S&P 500 saw its worst drop since January and India and the Asian markets are expected to follow suit on Monday.
An inverted curve is worrisome
On Friday, the inverted yield curve on US treasuries turned negative. This actually happens when the spread between the 3-month treasury bill and the 10-year one, turns negative. It is the first time since 2007 this has happened. This usually happens when the short term rates, move ahead of the long term rates. It is generally perceived as a sign of weakness and an indication that we maybe heading for a recession. Indian markets and most Asian markets are likely to react on Monday and we are most likely heading for lower levels. It may not be advisable to buy the dips unless there is a firm bottom in place.
In the past, when the yield has turned negative a recession has almost always followed in a year's time.
Sensex looks overvalued
In any case, even Indian stocks look overvalued. The Sensex and the Nifty are both looking overvalued at this juncture. The trailing p/e of the Sensex companies is close to 28 times. This makes it one of the costliest stock markets in the world. Until a few months ago, there were stocks that could have made for interesting picks. Among these include the likes of banking stocks. However, these have also turned expensive. At the moment, the only sector that has seen some decent fall and looks a little cheaper are auto stocks. For example, a stock like Hero Motor Corp gives you a dividend yield of as much as 3.70 per cent. If stocks like these fall, we can get it at a pretty decent dividend yield.
3000 points gain since Balakot strike
The Sensex has already gained 3,000 points since the Balakot strike and that is pretty huge. The belief is that the strikes would help Narendra Modi to win a second term. While that seems a possibility, remember if the NDA has to depend on other parties, the threat by the parties of a sudden withdrawal of support always looms.
Coalition is something that Narendra Modi has not been used to and if it happens, which is a possibility it would be interesting to see how he manages the same.
In any case, the markets are likely to be volatile going ahead.
Markets are slated for a fall
The Indian markets are no doubt going to follow global cues. If a recession looms, we are looking at the possibility of global markets falling and Indian markets following. The problem right now is that equity investment flowing into mutual funds is also slowing down considerably. If FPIs start selling aggressively, we might end-up losing substantially in the days to come. So, it is time to be a little cautious and not be overly exuberant. Remember, there is an election outcome that we need to grapple with as well.