What do you make of the correction that is happening in the market? Markets need a reason and as soon as there is any uncertainty, one can see that the first signs of leverage are getting reduced from the market?
There clearly was a risk of that given the markets looked somewhat frothy, valuations were looking somewhat stretched and we have also thin liquidity conditions as we are now going into December. But the reality is that the uncertainty around this variant found in South Africa has created obvious concerns in the market as there is again uncertainty about the potency of the variant and whether vaccines work against it
What spooked the market is just the fact that we really do not have much information about it and the concern is that vaccines could or may not work against it and that is creating a lot of market risk aversion at this point in time.
Do you think that markets are overreacting or is it just the leverage trade that was working in the market? Till now markets had not given you any correction and that is why this came as a surprise?
There certainly has been an increasing amount of leverage in the market and that is creating perhaps a bigger correction. But the correction has not been huge at this point. Obviously we are seeing a rally in treasuries, we are seeing equity markets coming off. But we need to see more information but you are right in the sense that there has been a lot of leverage. Global markets have been running fairly high in terms of the moves that we have seen including Indian equities and some correction was in the offing.
Now the depth of the correction will depend on how serious the variant really is. If it turns out to be not a significant or a major concern, then we will see another rally in markets and continued upside in risk assets. But we will wait to see and even the scientists and the experts are investigating. We do not really know the full amount of information to make that decision but we are going to the end of the year now and there may also be some profit taking in a lot of these risk assets. Maybe some leverage has been taken off the table and this is perhaps the trigger for that to take place.
Given the correction in the markets, what should investors do?
The experience of the last couple of years shows that these corrections reverse as we saw during the initial days of Covid crisis last year. The rally in risk assets in equities was dramatic in a very short period of time. But it is a bit like catching a falling knife. One does not want to jump in when there is such a lack of information and so much uncertainty around this variant. We may not see buyers emerge until there is a bit more clarity. So I do not think this is going to scare people off indefinitely. Investors will still want to jump back in at better levels. Last year also we saw a lot of buying on dips.
But there are a number of headwinds here — the huge amount of leverage, valuations and the fact that we got thinner liquidity now. So one has to bear in mind that all these factors are exacerbating some of the moves.
