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Equity Markets may have made 6 to 9 month top

Our take is that the Equity markets globally may have formed 6 to 9 months top and are likely headed for 8 to 10 % correction. Rising bond yields will act as a big drag on the markets and rallies will be sold into. As regards the Indian market, LTCG too is a concern.

Equity Market valuations around the globe were on a high, driven by earning upgrades an outcome of synchronized global growth, as well as historically low interest rates.

However, we believe this situation fundamentally changes with inflation showing signs of returning in the developed world and bond yields rising sharply. US 10 Year yields have moved up sharply to 2.87% as well as the 10 Year Indian Govt. bond Yield is up 100 bps to 7.55%.

Yields going up so sharply acts as a drag on Equity markets. Firstly it compresses the Earning multiples, since the NPV of future cash flow has to use higher discounting rate. Further at the margin investors find the bonds relatively more attractive, leading to asset reallocation.

We believe that the rise in bond yields will be sustained and continue to act as a big drag on Equity valuations. While ageing population and productivity increases had kept inflation contained in the developed world for many years, however the fact that all the economies are operating at near full capacity (unemployment levels at historic lows) and witnessing further growth is a sure recipe for inflationary pressures arising in the days ahead.

However, the fundamentals of Indian Equity markets remains strong and any selloff should be used to increase Equity allocations.

Our recommendation is that, while we need not immediately rush to buy, however we should start increasing Equity allocations around 10,400 NIFTY levels.

WealthSpring Advisory Services
5th February 2018

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