Financial markets future trends

A beginning of a multi-year bull market from the panic lows of March can be ruled out. Traders should remain alert.
Global financial markets – once again – surprised investors as well as economic pundits as they recouped almost all the losses witnessed due to the COVID-19 pandemic.
Some indices like NASDAQ COMPOSITE went on to make new lifetime highs, whereas Brazilian Bovespa from Emerging Markets segment outperformed with gains of 67 percent from the panic lows of 61690 registered in last March. Meanwhile, Dow and DAX registered a little over 50 percent gains whereas Indian Nifty and CAC appreciated around 45 percent from their respective March lows.

As President Trump continues to sink in the polls, the likelihood of a Democratic sweep in November increases. And that’s something financial markets need to be thinking about now.
“I would say the chances of a decisive Biden victory, with the blue wave, the Democrats taking the Senate and keeping the House, the chances are quite good today,” Greg Valliere, Chief U.S. Policy Strategist at AGF Investments, told Yahoo Finance.
The latest Reuters/Ipsos poll (taken July 15-21) found 46% of voters said they would support former Vice President Joe Biden in the election, while 38% would vote for Trump. Trump’s approval rating on handling the coronavirus crisis was modestly positive in late March, but has since fallen, with 58% disapproving and just 38% approving, according to Fivethirtyeight. Biden has an eight-point lead over Trump on average, and a double-digit lead in some polls. And Financial markets are daring to dream of a big blue Biden tsunami.
Among the developed world FTSE remained an underperformer as it gained only 32 percent whereas from emerging markets space Shanghai Composite which is the epicenter of all this crisis recorded gains of just 30 percent from March lows.
Economists and Financial Market experts, who anchor their opinions based on economic principles were taken aback by this kind of strong performance whereas Contrarian investors who followed in the footsteps of Baron Rothschild, an 18th century British Nobleman and a member of Rothschild Banking Family who said “Time to buy is when there is blood in the street”, ended up with a Cheshire smile after three months. Rothschild is believed to have amassed a fortune by buying in the market crash during the Battle of Waterloo. This kind of recovery shall baffle every one equally as it is really sharp and in the midst of zero fundamental developments since March across the world.
Though there is no consensus on what is a bubble it is generally accepted that in Financial Assets bubbles will form when the underlying valuations of the asset class fail to justify the astronomical market prices prevailing for a prolonged period.
It seems jumbo stimulus packages announced by the global central bankers seems to be the sole reason which resulted in this rally.
Now, undoubtedly the major worry should be the fact that institutions like IMF and World Bank were forecasting slowdown and recession for the near future even before COVID–19 pandemic broke out.
In such a scenario, economic recovery process shall get accelerated on the downside making the forthcoming recessions one of the worst and ideally financial markets should also be remained subdued and atleast consolidate after the corrections but surprisingly they are heading higher and on the verge of making new lifetime highs after recovering all the post COVID losses.

in India economic fundamentals started deteriorating since the year 2015 for a long time but the market was heading in opposite direction to what real economy was suggesting and Nifty50 almost doubled from the year 2016 lows of 6825 to a recent high of 12400 levels.
In the last 10 years i.e. from the lows of 2252, registered in the year 2008, it almost delivered close to 6 times returns. After this kind of rally, history valuation metrics of Sensex were hinting at a possible major correction going forward as revealed by the following table unless earnings recover sharply to justify the current rally in indices.
Sensex is currently hovering around the same multiples from where indices corrected sharply in the past as revealed by the above illustration. Currently, Sensex earnings multiple is around 24.72 with a dividend yield of 1.04 and Price/Book multiple of 2.78 making it vulnerable for a sell-off. To prevent this scenario only option available is a sharp increase in earnings which looks unlikely in the next 6 months stoking the fears of a bubble or slipping into a prolonged sideways phase with limited upsides.
In light of the above discussion, a beginning of a multi-year bull market from the panic lows of March can be ruled out. Our best-case scenario for equities should be prolonged sideways consolidation in the next 6 – 9 months with limited upsides but in case of correction, downsides can be at least 10%.
Hence, traders or investors should remain alert as fall can be a minimum of 10 percent as happened in the past.

By Domenico Greco

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