Markets are volatile

Markets continue to remain volatile. This past week was a spoiler for the next phase in the markets. We clearly seem to be moving in a different era from the period of easy liquidity seen since the unleashing of the same in the year 2008. Since then central banks all over the world have maintained a status quo on ensuring liquidity to ease the pressure created by dysfunctional markets as a direct aftermath of the global financial crisis. Are we then headed for “normal” markets? Dare we believe again that markets should auto correct to movements in inflation and interest rates and valuation of asset markets? Should classical economic theory again come out of the text books and explain the current state of the markets?

Are interest rates going to remain higher for longer?

The immediate ramification is on where interest rates are headed. Does the inflation corridor suggested by the US Federal Reserve now look to be redundant given robust economic growth, earnings momentum and near normal credit markets? If so then higher interest rates may not appear scary. They are natural self correcting reactions to overheated markets. And in phases of robust growth asset markets continue to do well in spite higher interest rates.

Just when we feel that the market is ready for higher rates, we scare ourselves again with the impending recession this may entail (however brief) and clamour for the comfort of easy liquidity and low interest rates will increase.

How does India fit into the “New World”?

The economic dynamics of India however are quite removed from the world at large. India’s large and meaningful domestic economy, tremendous purchasing power of the younger population and relatively benign capital markets are fuelling a once in lifetime bull market. For the first time the small investor has participated in the capital markets via his growing presence in the mutual fund space. Even equity market participation enhanced by new age investment apps have made inroads into the younger age groups making this almost the equity cult that many have been waiting for.

Combined with a robust market for new pubic offerings and continued earnings momentum it appears that the India growth story has a lot going for it no matter how difficult the global situation may appear to be. Markets of course never will remain in an upward trajectory for ever, however astute investors should view any shorter term correction in the India equity markets a very opportune time to enter, double up or treat this as a great entry point for sustained longer term gains.