February saw the reversal of gains that equity markets, all over the world, made in the month of January. Volatility, apart from draw-downs, was also back with a vengeance. While there have been calls about prospects of mild to moderate gains still in 2018 from market experts on media, I would rather call this 'volatile but positive' just one of the scenarios which could pan out.
As I look at it, continuing on from my previous monthly updates, equity markets are in an indecisive mode and the bulls and bears are fighting it out to death. Whether the top made in January was the high for the year or the highs are still about to be made is anyone's guess. Comparing long bond yields (US) and equity market returns (US) over a 100-year time frame seem to suggest that equity markets fail to remain healthy or at least become riskier as yields approach close to 4% from a lower base. The point I am trying to make is that we not very far away from it if we consider 3 rate hikes from the Fed as given. The risk of policy error has also risen a whole lot now as we head into this 'balancing act' of unwinding and normalisation, especially considering the fiscal deficit picture.
In India, apart from global factors which has its own impact, the shocking light of fraud involving (PSU) Public Sector Banks has soured the mood even more. I wrote about this back in 2015 and it has taken a more than $2 Bn fraud to bring the great Ponzi scheme between willful defaulting corporates and banks to notice. With the changed guidelines of NPA (Non-Performing Asset) recognition and also of stressed loan restructuring from the RBI, I am worried that the world might come to see how much filth India has in corporate governance, ethics and investor orientation. The focus now lies more on the PSUs but I assess even private banks are not saints but just good doctors of books (of course that the tops management of private banks want to see their company's stock value up is no surprise). The accountant said, "Tell me what you want me to show". Strangely enough, the supposedly stable SIP money that was coming in from the enlightened Indian retail investor has also begun to finally trickle out of the door.
As I had indicated last month, I still remain in the cautious camp in markets but my portfolio activity has finally hit home the difficulty in shorting equity markets. Even though I was overall correct on my negativeness, wild gyrations in equity markets whipsawed my positions as after the trending decline in the earlier part of the month, see-saw movements continued throughout.
I fully expect this to continue and the only way to counter them is to construct better positioning.
On a lighter note, equity markets have become more like a battlefield with sirens like 'Oh! sell sell sell' and 'Oh! buy buy buy' on every political or economic development (with no regard for potency).