Several red flags indicate at a fatigue in markets: Andrew Holland

The domestic equity market corrected steadily during the past week, especially the benchmarks, as FPIs continued to book profits. In fact, the markets have been consolidating in a tight range the entire month of June with the Nifty50 hovering in a 300 point range. The question on the minds of investors is what after this sideways momentum ? Will the markets fall or rise from here ?

Andrew Holland, CEO Avendus Capital in a conversation with Money9 said, “Markets are possibly going to get more volatile from here. There are a number of reasons . One is that the US Fed has become more hawkish, this has led people to think about tapering, rate hikes which may ultimately dampen growth and inflation.”

In the developed markets, he believes that as people get back to work, the big question is whether people will spend more or save money. The answer to this will have an impact on the economic growth.

“My guess is that we would have seen the best of consumer spending already by then”, he said adding that while as part of good news inflation will fall with monetary measures but growth will also come down.

He said, “There could be a growth shock or a demand shock which the markets are not factoring in at this point. The debate will then move from inflation to growth and could globally cause a market correction also keeping in mind that valuations are sky high”.

On the domestic markets he believes that fatigue is setting in despite the fact that global markets are still inching higher.

“There are a number of red flags one must notice to figure out where are the markets headed. One is that the retail participation is at an all time level. This factor historically has been a key indicator as when the markets correct, these investors will be the first to exit especially from the broader market space. ”

The second factor he says, is the overvaluation in  the mid and small cap sectors. They are currently outperforming but Holland believes not every company will become a great one in future.

“The final concern is on the market cap-to-GDP which again is way above the historical average at around 115%. Usually you see a fatigue at this point. Now whether that happens in a year or six months we don’t know but there are enough indicators pointing to a correction”, he said.