Equity markets in India recovered from their February lows thanks to the improving sentiment worldwide and incremental flows from the Foreign Institutional Investors (FIIs). The S&P BSE Sensex is already up 16% over the last 4 months and positive surprises such as prediction of above normal monsoon as well as strong Q4 corporate earnings keep the optimism high despite expensive valuations. Since the time Sensex touched the lowest point of 2016 on February 11, the FIIs have poured Rs 31,109 crore in Indian equity markets. At present, everything looks set for the flight of the Indian equity markets to take off. If you are planning to fly high on the current rally, you should hold yourself back.

This is not to suggest that the investment climate has become unfavourable in India. But as you tighten your seatbelts and switch off your electronic gadgets when the flight is in “take-off” mode, be aware of the risks that threaten the market rallies.

Is market rally going to end now?

Data as on June 10,2016
(Source: AVE MF, PersonalFN Research)

What are the downside risks?
This time, the risks appear to be emanating from global factors.

The U.S. economy has created just 38,000 jobs in May against the expected 1,62,000. Despite this, the medium term outlook on U.S. Federal Reserve raising rates has remained unchanged. It is expected that as the Fed raises interest rates, US$ may flow out of emerging markets. The United States monetary authorities may maintain its status quo until referendum in Britain about exiting the Eurozone (BREXIT) isn’t performed. In the coming days, Britain’s exiting Eurozone may create a huge volatility in the markets. Besides, Indian markets face another risk of US$ flow in the September-October period as huge FCNR deposits fall due. Although RBI remains confident about covering the risk of Rupee volatility, equity markets may not be insulated against outflows.

PersonalFN is of the view that, as the global scenario gets trickier, Indian markets have started falling. However, PersonalFN believes that speculating on market direction, most often makes you more losses than profits. In May, many participants were expecting markets to fall, but on the contrary, they rose. While weakness in China threatened to drag the global markets in January 2016; markets recovered quickly. These instances are enough to indicate that as a smart investor, keep investing regularly in markets and treat any sudden fall as an opportunity to buy more.

If you are investing in equity mutual funds, stick to funds with a proven track record. PersonalFN offers paid unbiased comprehensive mutual fund research services.

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