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Below the Comment on Market Outlook : Death, Taxes and Corrections By Mohit Gang, Co-Founder/CEO, Moneyfront

Benjamin Franklin famously quoted once, that only two things are certain in life - Death and Taxes!

We add the third one - Market Corrections.

While, we are not the ones to be swayed by volatility or market corrections. We still feel the need to write about it.

Somehow, stars are aligning for a short-term check on market exuberance.

1. US 10-year yields: US 10year yields have topped 5% making a 17year high. A healthy gap between Indian 10 year and US 10year yield has always been in the range of 3-5%. Its currently at an abysmal low of 2.5%. For an FII investor, the favoured and safe trade right now is to go back to US and invest in the world’s safest instrument i.e. US Treasury with an attractive running yield, prospect of strengthening currency and high probability of capital appreciation in 1-2 year as the rate cycle reverses. For sure, odds for FII flows are stacked against India right now.

2. Geo-politics: Israel-Hamas conflict erupting beyond normal proportions could lead to disruptions in oil markets and global supply chains. While geo-political disruptions are nothing new and chances of this one escalating to other countries is low, we are still getting short-term jittery on this. Simply because this is yet simmering and haven’t erupted in full scale. World is still awaiting how Israel is going to mount its ground offensive and the counter offensive (if any) from Arab world thereof. We believe the first 7-10 days following Israel’s ground offensive will be extremely crucial and could lead to risk-off trade globally.

3. Gold: Gold is making all the right noises for wrong reasons. Gold seems to be gaining centre-stage of conversations and there is strong undertone of strength on the yellow metal off-late. This is again indicating a risk-off from Equity and a quest for safe haven globally.

4. Oil and India: Our relationship with Oil is a well-documented one and need not be over emphasised. At 90$/barrel, we are bleeding chips and if Oil shoots past 100$ mark, we will have no hiding places. Our CAD (current account deficit) deteriorates by 0.5% with every 10$ rise in Crude prices.

To counter this all, we have had our own domestic chinks in the armour. And till date, they have been fairly effective. Macro numbers, corporate earnings, well supported by robust domestic flows, have built a strong case for equities in India. SIP flow itself is now about $2Bn every month lending a much needed support to market. And with inflation cooling off gradually, Central Bank seems content with maintaining status quo on rates. 10yr GOI Bond yields though have shot up from a low of 6.9% to 7.4% in last 3 odd months, but then yields were at this level in Feb-March’23 also. So, unless we see a dramatic spike in yields, we don’t foresee much of a risk on the domestic narrative. Largely, the India story continues, just that the global environment has significantly worsened.

We are still hopeful, that geo-political tensions will not become a raging war with multiple countries involved in it. However, the situation will turn worse before it becomes better. Hence, we are tempted to give a cautionary short term note.