The fear of missing out, or FOMO, is the chief propellant of the global bull markets. However, the euphoria took a nasty U-turn on Friday with FOMO becoming FOTI, or the fear of trapping in. It was D-day for markets across the globe. The meltdown in equities and bond that started from Indian budget later on became a financial contagion and turned into a full-blown market mayhem.
Markets are brutal teachers and their backlash are often ruthless. Finance Minister Arun Jaitley took a middle path of fiscal slippage and attempted to woo farm votes and seek some profit share of swelling equity wealth of Indian households. Reintroduction of long-term capital gains (LTCG) tax, ambiguity about grandfathering and its possible impact on India-specific ETF, FII and bond funds got investors panicked as LTCG may badly affect their net asset values (NAVs) and make it harder to meet benchmark returns.
An attempt to raise Rs 20,000 crore from markets caused losses of around $70 billion or around Rs 4.7 lakh crore market cap loss. The BSE Sensex tumbled around 800 points. Many large cap stocks were down 5-10 per cent. However, the carnage was more deeper in small and midcap stocks. Some midcap stocks tumbled as much as 30-40 per cent during the past week.
From bonds to bitcoin to capital markets, its a mayhem
Bond market has also shown a knee-jerk reaction. Bonds tumbled and there was no buyer. Yields shot up to 7.78, worst in Asia, which compelled the Reserve Bank of India (RBI) to announce buyback and open market operation to prevent further fall. Selling is too high.
The government plans to mop up debt issuance of about $100 billion in financial year 2018-19 that also contributed to the mayhem. However, bond buyers would command exorbitant premium in the current risk environment.
A cocktail of several events led to a widely expected but hasty sell off. US Fed chairwoman Jennet Yellen retired last week before firing a warning shot on inflation and hinting faster rate hikes. The subsequent job data was also too strong, especially with the wage earning that shot up to 2.9 per cent. Market is now pricing in minimum three rate hikes. This could perhaps, become four. Yellen's exit added some nervousness in the markets because, if history is anything to go by, a change of guard during cyclical top or market top often produces deeper corrections and may even result in a bear market.
As inflation is lurking up—there are several symptoms that inflation is no more benign—bonds have sensed a turn of tide. Market gurus were giving warning about froth in assets, heightened complacency in markets and possibility of an assets bubble bust. However, nobody was in a mood to care about. Finally, the early warning shots were fired in last month's Davos meet.
Ray Dalio, founder of Bridgewater, largest hedge fund in the world fired the first salvo. Dalio declared bond is a bear market. Bond king Jeff Gundalch also expressed similar forecasts. He cited sharp jumps in gold, and also predicted faster rate hikes. Yields from 30-year bonds hit 3.06. Ten-year bond yields is now 2.85. If it manages to break the psychological barrier of three per cent, real panic would unfold.
Bond yields is already higher then S&P large cap dividend yield. If this gap widens, it would unmask unsustainable valuations and make bonds more lucrative.
Current expansion in global equities, especially in developed equities, is the longest in span and valuations. S&P increased almost 20 in 2017 without a single correction. S&P forward PE was much pricey around 18. FAANG (Facebook, Apple, Amazon, Netflix, Google) market cap is a total of $2 trillion. The US economy is in a solid state. European economic turnaround also looks robust. Manufacturing sector is doing well. Consumption is showing vibrancy. After a long time, emerging and developed—both economies are doing well.
However, there are a few wild cards. Crude oil bull market is big risk. Crude oil has almost doubled in the last two years. If crude oil prices firmed up towards $80-90 a barrel, it would compel banks to go for faster rate hikes. Balance sheets of banks are too big. Monstrous money supply is also responsible for asset inflation and commodity inflation. A commodity bull market will be a kill deal for equity parties.
Another coincidence of a deeper correction is linked with a superstition called Hindenburg omen. The Hindenburg Omen was a proposed technical analysis pattern, named after the Hindenburg disaster of May 6, 1937. The signal appears when the daily number of ups and downs on the NYSE exceed 2.8 per cent advances and declines on the same day. It is valid for 30 trading days after it occurs. A Hindenburg omen might be best observed when there’s a quick increase in the amount of new lows in the wake of a fast-rising market. Its accuracy about predicting a crash is poor. But whenever major crashes happened, the omen appeared a few weeks ahead of it. In the current scenario, chances of a full-blown bear market is less likely, but scenario demands careful, dynamic and need-based assessment.
We are in the age of disruption. Machine learning, algorithms, 3D printing, internet of things, virtual reality, artificial intelligence, automated trading, and digital investment and trading is the hottest trend among urban youth. Bitcoin is the icon of digital assets and crypto avenues. “Bitcoin is gold disruptor,” said Cameron Winklevoss, founder of bitcoin exchange Gemini, when bitcoin hit 16,000. “If gold market is valued at $6 trillion, bitcoin will rise 20 times from here (to replace gold).”
Bitcoin hit close to 20,000 as euphoria reached to the extreme due to launch of futures trading. However, the fancy trading was busted in just one month and bitcoin is now down 60 per cent from the peak.
Meanwhile, the Indian government indicated that crypto currencies are illegal in its Budget 2018. Many governments imposed ban and tightened regulations. Several crytpo exchanges goes bankrupt. Blockchain technology is not as safe as it was proclaimed. Frequent hacking and stealing of bitcoin is a menace. The latest jolt came from big banks. JPMorgan and many other banks stopped accepting crypto currencies in credit card transactions. G20 is likely to announce some major actions in crypto space when they meet in Istanbul the next month. However, the biggest unthinkable risk is the future of FAANG. Even a 20 per cent correction in FAANG stocks could jeopardize the entire world.
Yellow metal rediscovers its inner bull
Amid all these turbulence and chaos, gold has rediscovered its inner bull. After a prolonged hibernation and trading between choppy band of $1,150-1,350, gold is likely to outperform bond, cash and many frothy assets. The current technical charts look bullish. Fundamentals also look bullish. Gold is the oldest asset class. Having a history of more than 3,000 years, gold is proven inflation hedge. Faster rate hikes in the US may put pressure on emerging markets.
Some investors who left gold for the crypto frenzy are coming back to gold. In the current Indian context, gold prices remained fairly stable since the past five years. The metal mostly trade between Rs 27,500-30,500. The yellow metal is likely to bottom out in February-April, at around $1,250-1270 and may rise to $1,450-1,500. If inflation ramps up and banks fail to hike rates in matching pace, gold could rise even higher towards $1,700. Gold price hit all-time high around Rs 35,000 in 2013. Gold may touch Rs 32,500-33,000 or may even breach the previous high ahead of Diwali.
