”Trouble comes in threes” goes the proverb.
So, when the budget threw capital gains tax at our stock markets, we kind of knew that it was not going to be the end of bad news. The U.S markets quickly went into a steep fall on two sessions, sending global markets into turmoil. The Indian markets kept stabilizing after each day of turmoil in the US markets. But these are more in the nature of a habitual “Buy the Dip” strategy adopted by domestic mutual funds and retail investors.
Two trouble spots for our markets are now amply clear. The curious question is where can the third trouble spot emanate from for our markets? Inflows into mutual funds seem to be stable and show no imminent sign of slowing. There are no imminent worries for investors. People seem to show ample confidence by buying into corrections. FII selling is a spot of bother. But, their selling seems to be getting absorbed comfortably. So where can the third spot of trouble emerge from?
One potential trouble spot can be the global bond markets. Bonds can put equity in a bind. And the trouble will possibly start with the US markets and rattle global debt markets. This will set equity markets up for an earnings reset. An earnings reset can potentially lead to a valuation reset. We need to have a more risk averse approach to investing. Expect more trouble.
“Recognizing risk often starts with understanding when investors are paying it too little heed.”– Howard Marks