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Are the markets heading for a deep correction?

06 Nov 2014 |By: Sunil Patni

Are the markets heading for a deep correction

A 70% jump in 6 months does not bode well for global equities. The boom – bust cycle is an inherent character of the global as well as Indian capital markets. Therefore, what has gone up must also come down – albeit only to move up again. During the past, whenever such consistent buoyancy survived for a couple of months, the market always invented reasons to correct. The degree of correction varied according to the demands of the circumstances.

Take the case of the 2008 economic crisis. A deep correction and even before harried investors could realign themselves, the markets were moving north again.  Between January, 2009 and October, 2014, the S&P index had nearly doubled.  Therefore a deep correction is only overdue perhaps.

Corrections are opportunities

For most value investors corrections are corrections present the opportunity to take fresh positions at lower levels.  It is also important to dig in and see where the large sell offs come from.  It is not uncommon for prudent investors to sell large volumes of equities in one or more companies and then wait for the correction to taper out before re-entering the same stocks.  That they make a neat little pile in the bargain and become fence sitters watching the agony of the retail investors is a moot point.

Is the U.S. really out of the woods?

Unemployment rates in the U.S. are dipping and consumption is improving too.  When unemployment rises, consumption shrinks and that is not good news for an economy that regards consumption as the key driver for growth.

However, there is another school of thought which holds that a technical break-down is indeed on the cards any time early 2015. Potentially, such an event can set the clock back and compel the U.S. Fed to come right back with more stimulus to hold the economy afloat.  With most international trade linked to the US dollar as a reference currency, the Fed is going to the mint to produce more currency to fund the stimulus packages cannot be prevented.

Indian Capital markets better poised

Thankfully, the Indian capital markets are better poised to weather the correction since the local factors are more supportive.  Among the emerging markets, the Indian markets remain the most attractive to produce an annualized return of 15 to 20%.  As at mid October, the net selling by FIIs amounted to about 1,000 crores. But, this volume is not at all alarming considering the overall exposure. Add to this the positive indications from the Prime Minister’s US visit pointing to more money finding its way into the Indian Capital markets, even the nifty dipping to 7000 should not be a major cause for concern.

As we step into the festive mode, caution is the watchword and investors can look to make some money despite the corrections that the pre-Diwali week has already witnessed.

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