Feb 2, 2016

Market Update 2/2/2016

We've had a very volatile period in the equity markets between this post and the last. The markets are down nearly 6% in the interim.

Technically the Sensex broke an important psychological support of 25,000. The short-term momentum indicators are now in the neutral area. This makes it difficult to predict in the short-term ( In our last post we'd mentioned that the momentum indicators were neutral but we had a period of extreme volatility immediately post that. We admit to our mistake.)

Fundamentally, the markets look more attractive since the correction. The markets are now close to their long-term median valuations. However, we don't recommend a 'jump-in and buy' yet. We still recommend holding on to the previous asset allocation. If the markets correct quickly or, if the markets remain in this range for an extended period of time, then we will re-visit our allocation.

Corporate earnings remain weak and we could see some downward revisions in expected earnings. The budget will also be announced towards the end of the month. Both events will be watched closely.

The 10 year G-Sec is currently at 7.845. This is marginally above what it was in the last update. Hardening of yields would have had a negative effect on duration plays in portfolios. Inflation has inched up to  5.61. The RBI kept rates unchanged in its policy meet today. While duration is a technical play, we believe that the continuing gap between inflation and repo rates gives the RBI room to reduce rates.

Crude oil continues to remain weak. Gold has jumped slightly and crossed the $1100/oz.  This gives worrying signals about the global economy.