Beware, There’s A Lot Of Stress Out There

It’s been a dream week for the markets. With benchmark indices hitting lifetime highs and the sentiment at all time optimistic levels, the euphoria, being dubbed as a pre-election rally, is expected to continue as we get closer to D-day. Periods like these are the most dangerous. Investors tend to lose sight of contra factors that could come and spoil the party in some form or the other. Presently, FIIs are bringing in money by the hordes feeling safer on placing risk on bets. That, in the Indian context is mainly driving indices to dizzying levels.

Globally too, the negatives are looking far less than positives. The uptick in economic growth of the developed markets is getting stronger. In fact growth rates for the US economy are slowly inching towards an average which could get closer to some of the faster growing developing markets. The monetary policy stance in the European region is helping keep those markets steady.

Overall the investment environment is beginning to look pretty positive not just in the Indian context but globally too. However, market volatility is a stark reality. No matter how much of positivity the market exudes, the emergence of Black Swans cannot be ignored. In fact, the Ukraine crisis is the best example of that. Even as economics was just about managing to take the front seat, geopolitics came back with a vengeance to haunt markets. That event is temporarily out of frame, but is still lingering behind the scenes. It could raise its head any time pulling down markets.

But a dip from the current levels (even if it happens) should be your opportunity to buy. The most important trigger from a longer term perspective is the outcome of the general elections. That part of it looks pretty much in favour of the markets right now. The permutations and combinations are being put in place and most of them seem to be decisively pointing toward a stable government and good leadership. As we head more closely toward that, markets will certainly price in the impact and head higher.

As for the short term, economic data points to be released this week should be the driving forces. Industrial production and inflation numbers for the preceding months are to be announced during the course of the week. These should keep the markets ticking. There is really nothing much to expect from the industrial numbers. Any improvement, even if it comes in, would be more on the back of a lower base effect. So reading too much into them could be a little overstretched. Yes, inflation could be a point to look at more carefully. With the RBI meet to review monetary policy soon approaching (April 01, 2014), that data point could now be at the nucleus of all investment and economic decision making.

For now, Asian markets are reeling under the pressure of economic data that has emerged from Chinese and Japanese shores. Inflation has slowed but the problem with China lies in its trade balance data that has emerged. Exports have declined quite unexpectedly by 18.1% in the month of February from a year earlier leading to a trade deficit of USD 22.98 billion. The impact is visible in the way Asian markets are currently trading. All, without exception are down with the Japanese Nikkei trading 1% below its earlier close while the Shanghai Composite trading 1.32% below its previous close. Hong Kong, Indonesia, Malaysia, Singapore and Taiwan are all trading down in early trades.

Global cues are looking horrible this morning. After skyrocketing to their life time highs, Indian markets will face the pull effect of weak global cues at the opening bell. A profit booking spree could see benchmarks ease considerably in opening trades and the markets would have to bear the strain of a negative bias that sets in with global pressures. Stay focused on the larger counters to avoid getting whipsawed by the volatility. Mid and small caps are best avoided in markets like these.