5 factors that may have a bearing on markets in the coming months

The Indian equity market have continued to limp downwards in the aftermath of the PNB scam, and the trends witnessed in the recently concluded by-poll elections are making the markets jittery and sentiments sour. The global markets have somehow shrugged off fears emanating from rising bond yields (which still remain pretty elevated), a rising interest rate cycle (with the FED expected to raise rates by 25bps later this week), cyclical inflationary pressures playing detrimentally on discretionary spending patterns and the narrowing of spreads between the 10yr government paper and riskier asset classes like equities. For now, liquidity still appears fine and there is no undue cause of concern and visible trends being seen as a shift from equity linked assets to other asset classes. Albeit, there are 5 factors that can have a bearing on the equity markets in the coming few months:

Trade wars: First and foremost, we need to understand that a trade war was last seen nearly 80 years ago and that led to the great depression of the 1930s. Technically, trade wars are negative for 2 reasons. Firstly, higher import tariffs do not encourage domestic industry but they surely lead to higher levels of imported inflation. Secondly, trade wars eventually degenerate into currency wars with countries trying to competitively devalue their currencies to make their exports more attractive. While the EU and China have threatened to retaliate, we have not seen any concerted action. Both the EU and China are just seeing their economies recover from a prolonged economic slowdown and they will not be keen to get into a trade war at this point of time. We are confident that more acceptable solution will be found without degenerating into a trade war.