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Dalal Street may remain laal as investors wake up to a new risk

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NEW DELHI: If analysts were to believe, the market selloff that wiped 500 points off Nifty in a single session in Friday’s trade may extend for a couple of days. According to analysts, bond market fears over inflation, despite US Federal Reserve’s assurance, are a strong hint to the stock investors about rich market valuations, which the latter cannot shrug off easily.

Nifty50 can fall up to the 14,300 level and that while a bounce can come, the market looks set for a time-wise correction, say analysts.

“Bond market is bigger than the equity market globally. It is pricing in higher inflation down the line. That is despite the US Fed’s assurance of keeping the low cost of money intact. Equity investors have woken up to this risk. If the cost of borrowing rises, then the DCF (discounted cash flow) value of companies will fall and, hence, equity value will fall. It is a negative element, which the equity market is now trying to factor in,” said Umesh Mehta of Samco Securities.

Mehta said the recent market rally was similar to the rally that was seen after World War II wherein the US government spent hugely, and the market saw some correction before rallying again.

“In India, stocks have doubled. We will see time correction, as the market had priced in the next six months of earnings when we were at 15,400,” Mehta said.

Sunil Jain of Nirmal Bang Securities said that the market has already seen a decent amount of correction over Thursday’s level.

“One cannot predict the near-term fall, but since the recent rise has been very sharp, a fall can also be sharp. Last time also, Nifty50 saw a correction of over 1,000 points. Today in a single day, it has corrected 500 points. These corrections will keep on happening as we are at very high valuations,” Jain said.

Jain said one should keep in mind the possibility of corrections of 8-10 per cent while investing.

Deepak Jasani of HDFC Securities sees Nifty50 testing the 14,300 level in coming days.

“From now, the market won’t see sharp bounces. The market would recover, but slowly. One can expect three-four weeks of time-wise corrections,” Jasani said.

“Nifty50 may see a short term trend reversal below 14,600. We thus advise keeping existing long positions hedged,” said Ajit Mishra of Religare Broking.

On Thursday, the US 10-year yield climbed to 1.614 per cent — the highest in a year. The reason why bond yields are rising is concerns over inflation in the US. The bond market is expecting the likely rise in inflation to push the US Federal Reserve to either lower monthly bond-buying or hike interest rates. That is seen as a negative for emerging markets like India, which have been a major beneficiary of foreign inflows of late.

By and large, bond yields are inversely proportional to equity returns. When bond yields rise, equity markets tend to underperform. The Taper Tantrum of 2013 is infamous for how the sudden rise in bond yield caused equity markets to slide, as it resulted in mass selling of bonds.

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