While Global economy was going through tough times, liquidity all across the globe from different central banks kept things going. ECB offered fiscal packages, USA kept its interest rates lower for a longer period of time, Japan has slipped into negative interest rate territory. China kept liquidity flow to keep its currency competitive in comparison to major currencies across the globe. But, now the time has changed. Economic data is improving; inflation is showing signs of recovery in demand & consumption. Further liquidity could make things worse.
If we analyze liquidity situation in last three months; following should be the points to focus on. Inflation all across the world is improving; Economic macros are showing signs of improvement. Japan can’t continue with declining interest rate cycle, china has already indicated no more fiscal packages, ECB has also started tightening. On the top of it, US will increase interest rates at least twice in the calendar year 2017.
Most of the leading stock markets are trading near all time highs. Valuations seem to be expensive. Most of the positives are already factored in the value. There could be a steep fall in markets in view of squeezing liquidity from the markets.
Although India may be a different story as interest rates in India are in a falling trend. Inflation is coming down & reforms by the Govt. are giving an edge. Demonetization has balanced the excess liquidity in the system which was available in the form of black money. Any 5% to 7% correction in Indian Equities will give a fair chance to invest for the long term. India can’t be insulated from global markets therefore corrections will be there.
We are expecting corrections in the short run in Indian Equities whereas in the long run it will remain a shining star.